https://t.me/TheHindu_Zone_official MONDAY, 18 MARCH 2019 www.business-standard.com 18 pages in 1 section MUMBAI (CITY) ~8.00 VOLUME XXIII NUMBER 153 How markets performed last week *Oneweek Local currency in US $ 38,024 11,427 25,849 7,689 29,012 21,451 7,228 11,686 3.7 3.5 1.6 3.8 2.8 2.0 1.7 2.0 5.4 5.2 10.8 15.9 12.3 7.2 7.4 10.7 6.4 6.2 10.8 15.9 12.0 5.5 11.9 9.3 --——————————————————————————————————————————————————————— BACK PAGE P18 DEFENCE REFORMER WITH A CLEAN IMAGE GOA BJP LOSES PARRIKAR ADVANTAGE SPECIALS ON MONDAY BANKER’S TRUST: $5-billion swap smartest move of RBI governor 12 > The new instrument could be a permanent fixture in the RBI’s liquid management toolkit, the level of the rupee determining the frequency of use. TAMAL BANDYOPADHYAY writes PERSONAL FINANCE: Invest in REITs for regular income 14 > While experts expect this new asset class to give annual returns of 12-14%, investors should temper their expectations in view of cyclicality in commercial real estate. SANJAY KUMAR SINGH & TINESH BHASIN write BUSINESS LAW: Implant victims lack legal backing 17 > The regulator’s ruling on compensation has to be backed by statutory provisions in law. AASHISH ARYAN writes THE SMART INVESTOR: Large fund infusions in PSBs fail to deliver 15 > The Nifty PSU Bank Index is flat since the Centre announced a ~2.11 trillion recapitalisation plan in October 2017; experts say stick to top stocks such as SBI and BoB. SHREEPAD S AUTE & VISHAL CHHABRIA write Support of key institutional investors crucial in case of an open offer CARVING UP THE PIE DEBASIS MOHAPATRA Bengaluru, 17 March T he Mindtree founders are reaching out to top clients and engaging with key institutional investors to fend off attempts by engineering major Larsen & Toubro (L&T) from making a hostile takeover bid, sources in the know said. Last week, the Bengaluruheadquartered firm said its board would consider a share-buyback proposal in its next meeting scheduled for March 20. The announcement of a possible share repurchase has come amid reports of L&T’s board giving the green signal to buy Café Coffee Day founder MINDTREE V G Siddhartha’s SHARE 20.41 per cent stake in Mindtree. BUYBACK As corporate TO MAKE TAKEOVER action like a buyback usually pushes COSTLY up the share price, PAGE 2 many analysts had seen it as an attempt by the management to make it costlier for any acquirer to take control of the company, apart from rewarding existing shareholders. But apart from the price play, the management of the infotech (IT) services firm is actively talking to key institutional investors to garner support in case there’s an open offer. Currently, Pulak Prasad-run Nalanda Capital holds 10.61 per cent in Mindtree, while Akash Prakash-led Amansa Holdings Turn to Page 6 > owns 2.77 per cent. Shareholding pattern of Mindtree (as of December 2018) | Founders’ group | V G Siddhartha & his holding companies | Foreign portfolio investors | Mutual funds | Retail investors & others 13.32 17.75 8.34 % OF HOLDING 20.41 Centre may hike import duty on consumer durables yet again ARNAB DUTTA New Delhi, 17 March Not content with raising the importdutyonkeycomponentsof television (TV) sets last year, the governmentisnowmullinganother round of duty hike — this time on raw materials used in home appliancessuchasairconditioners (ACs), refrigerators, washing machines, and microwave ovens. It is learnt that the Ministry of Commerce is considering a proposal to increase Customs duty on compressors for ACs and refrigerators and pre-coated steel sheets and copper tubes used in making condensers, among others. This, despite the fact that the duty on compressors was raised from 7.5 per cent to 10 per cent last year and that on fully finished ACs, refrigerators, and washing machines, among other items, doubled to 20 per cent. Manufacturers are worried about the impact of the proposed move. While the last import duty hike had forced them to increase the prices of these items by 3-5 per cent, any further hike in import duty would adversely impact local manufacturing activities, they said. In fact, major players in the consumer durables space are demanding a complete abolition of duty on components for TVs and home appliances. According to Vijay Babu, vice-president for home appliances and ACs, LG Electronics India, the Korean company has taken up the issue with the Centre. Turn to Page 6 > Mumbai, 17 March Source: Exchange filing Co-founder quits govt role to take on raiders Subroto Bagchi — one of the co-founders of Mindtree — resigned on Sunday as the head of Odisha Skill Development Authority and will return to Bengaluru, he said on his Twitter handle. “An imminent threat of hostile takeover of Mindtree has made me resign from the (Odisha) government, (so that I will be) able to go, (and) save the company,” he said. “I must protect the tree from people who have arrived with bulldozers and chainsaws, so that in its place, they can build a shopping mall.” Turn to Page 6 > | Higher import duty on key components for ACs, refrigerators, washing machines, and microwaves on the table | InSeptember2018,duty onACs,refrigerators,and washingmachines doubledto20%;for compressorsto10%, from7.5% | Manufacturersvoicetheir concernstotheCentre; seektotaldutyabolition onallcomponents | Another round of price hikes could follow after duty increase; prices have gone up by 8-12% since 2017 | Centre wants to curb import of these items as CAD inches towards 3% of GDP in Q2FY19, from 2% in Q3FY18 Maruti cuts production by a quarter SHALLY SETH MOHILE 40.18 DUTY BOUND A slowing demand in India’s passenger vehicle market has prompted the car market leader, Maruti Suzuki India, to cut production by a quarter over March last year, said people aware of the company’s plans. Maruti is estimated to have cut production to around 126,000 units as compared to more than 172,000 units a year ago, which is a 26.8 per cent reduction. This is in sharp contrast to a positive trend in the past several years, including double-digit growth for the last four years. MILES & MONEY ON THE CLOCK Maruti March production volumes YoY chg (%) 126,000* MANOHAR PARRIKAR, Goa chief minister (CM) and former defence minister, who had been battling pancreatic cancer for more than a year, has died at his son’s home in Panaji. He was 63. Parrikar’s heath had been fluctuating for several days and worsened on Saturday morning. The former defence minister had been in and out of hospital in Goa, Mumbai, Delhi, and New York since February last year. The four-time CM had said in January that he “will serve Goa till my last breath”. While presenting the state Budget of the Goa Assembly in January, he made up for his weakened delivery with rousing words: “Present circumstances have prevented me from delivering a detailed Budget speech, but there is a josh that is too high, very high and I am in hosh. Fully in hosh.” Mindtree taps institutions to block takeover 172,195 MANOHAR PARRIKAR PASSES AWAY AT 63 PUBLISHED SIMULTANEOUSLY FROM AHMEDABAD, BENGALURU, BHUBANESWAR, CHANDIGARH, CHENNAI, HYDERABAD, KOCHI, KOLKATA, LUCKNOW, MUMBAI (ALSO PRINTED IN BHOPAL), NEW DELHI AND PUNE 153,868 December 13, 1955-March 17, 2019 NIIF BOARD COLD ON IN UNCHARTED WATERS: LITMUS JET RESOLUTION PLAN TEST FOR FRESH FACES IN TN 139,516 Source: Bloomberg POLITICS & PUBLIC AFFAIRS P16 122,314 *Change (%) over previous week COMPANIES P2 108,696 Sensex Nifty Dow Jones Nasdaq Hang Seng Nikkei FTSE DAX % chg over Dec 31, ‘18 Index on Mar 15, ‘19 101,966 — 2013 2014 2015 2016 2017 2018 2019 — 6.6 12.5 14.1 10.3 11.9 -26.8 *Estimate The cut comes amid demand uncertainties ahead of the Lok Sabha elections and Assembly polls in some states, and a switch to stricter Sources: Siam, Capitaline emission norms, which takes effect on April 1, 2020. A Maruti Suzuki India spokesperson declined to comment on Turn to Page 6 > the matter. SpiceJetlikelytooperate groundedJetaircraft ARINDAM MAJUMDER New Delhi, 17 March Lessors of cash-starved airline Jet Airways are in talks with SpiceJet to reposition some of its Boeing 737 Next Generation aircraft. SpiceJet, which has been hit by the grounding of 13 Boeing 737 MAX planes, is looking to secure used aircraft to maintain its expansion plans. “Lessors of Jet Airways have discussed with SpiceJet to place their aircraft with the latter. SpiceJet wants 12-13 planes. Depending on the duration of the 737 MAX grounding, it may take more,” said a person aware of the development. At least two lessors — GE Capital Aviation Services and BOC Aviation — have terminated the lease Around 50 planes of Jet are grounded due to non-payment to lessors; SpiceJet has 13 737 MAX grounded contracts of around eight planes because no clarity on payment has been given. Lessors have grounded more than 50 of Jet Airways’ planes because the airline has been unable to pay them. It has been more than five months that the airline has made any payment to its lessors. Turn to Page 6 > Binny Bansal may shift to S’pore for deeper role in start-up world INCUBATING IDEAS | Even from Singapore, Binny Bansal plans to support Indian start-up founders | Started second venture xto10x Technologies to help early-stage firms scale | Backed 021 Capital, invested in Acko and Cero since departure from Flipkart | Has over 40 angel investments: CureFit, GreyOrange, Ather Energy, Inshorts YUVRAJ MALIK & DEBASIS MOHAPATRA Bengaluru, 17 March Feted for jump-starting India’s internet retail industry after co-founding the country’s most-valuable e-commerce giant Flipkart, Binny Bansal is moving base to Singapore, multiple people in the know said. Since his unceremonious exit from Flipkart in November last year, Binny has kept away from the limelight and was said to be contemplating his next move. In this period, he has invested in insurance platform Acko, venture capital (VC) firm 021 Capital, and floated a new start-up called xto10x Technologies. “Binny now spends most of his time outside. He is in Singapore and travels to India often,” a source said. While reasons for his move are not immediately clear, sources said he https://t.me/TheHindu_Zone_official would have a bird’s eye view of the latest technologies and start-ups, and a more intimate access to investors as well as financial markets from Singapore, the de facto financial nucleus of Southeast Asia. On reaching out, a spokesperson for Binny Bansal said “at this point, Binny Bansal is scaling up the xto10x Technologies business, including overseas.” In December, Binny started his second venture xto10x Technologies with former colleague Saikiran Krishnamurthy, who was the head of Flipkart logistics arm eKart between 2015 and 2017. According to its website, xto10x Technologies helps early-stage start-ups build capabilities across functions like strategy, finance, human resource management, and growth. “I’m looking forward to the next chapter of my life. Person to person, I can help 10 start-ups, but the ambition is to help 10,000 early- and mid-stage entrepreneurs, not 10,” Binny had told a wire agency in a February interview. Turn to Page 6 > https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official 2 COMPANIES MUMBAI | MONDAY, 18 MARCH 2019 > IN BRIEF Kesoram Industries rating downgraded to BB+: CARE CARE Ratings has revised down the rating pertaining to the long-term banking facilities of B K Birla group company Kesoram Industries from BBB to BB+ and short-term facilities from A3+ to A4+ on higher than envisaged losses in the nine months of the current fiscal year amidst high debt levels. This has led to further weakening of the credit and financial risk profile, mentioned the CARE Ratings release. Kesoram’s total debt as on December 31, 2018, was at ~3,520.41 crore. CARE rated ~906 crore long/short-term bank facilities to BB+/A4+, under credit watch with developing implications and short-term bank facilities of ~705 crore A4+, under credit watch with developing implications. The revision in rating by CARE coincides with the letter of Kumar Mangalam Birla, chairman of Aditya Birla Group, to Sebi seeking reclassification from a promoter to a public shareholder in Kesoram. BS REPORTER< BSNL to move NCLT against RCom to recover ~700 crore AirAsia's Fernandes quits Facebook, citing social media ‘hate’ BSNL will approach the National Company Law Tribunal (NCLT) this week to recover dues of about ~700 crore from Reliance Communications (RCom), according to official sources. Earlier, debt-ridden RCom in its plea before the NCLAT said it wanted to voluntarily go back into the insolvency process, as it will help selling its assets in a time bound manner. It had moved the tribunal, seeking directions to the 37 lenders led by SBI to release ~260 crore directly to Ericsson. However, lenders of RCom have said it will lead to outgo of public money for settling payment of a private party. PTI< AirAsia Group Chief Executive Officer Tony Fernandes closed his Facebook account and said he may shut his Twitter page, citing “hate” being transmitted on the networks. “The amount of hate that goes on in social media sometimes outweighs the good,” Fernandes said in a Twitter post. “But on Twitter I think the battle for me goes on." Fernandes said his Facebook account had 670,000 followers. He said in a Twitter post Saturday that while he is “a big fan” of social media, he had to think hard about whether to remain on Facebook after the livestreaming of the mass shooting in New Zealand. BLOOMBERG< US-based Jubilant Cadista recalls anti-depressant drug J&K Bank to offload stake in PNB Metlife for ~185 crore US-based Jubilant Cadista Pharmaceuticals is recalling over 5,700 bottles of Bupropion Hydrochloride extendedrelease tablets, used to treat major depressive disorder, from the US market. The company is a fully-owned subsidiary of Cadista Holdings, which is a part of the Noida-based Jubilant Life Sciences Company. According to the latest Enforcement Report issued by the US Food and Drug Administration, Jubilant Cadista is recalling the drug for "failed dissolution specifications". PTI< Jammu and Kashmir (J&K) Bank on Sunday said it proposed to sell its stake in PNB Metlife India to private equity player Oman India Joint Investment Fund II for ~185 crore. The bank has executed share purchase agreement with Oman India Joint Investment Fund II for sale of 4.1 crore shares of PNB MetLife India Insurance Company, J&K Bank said in a regulatory filing. This would be subject to fulfilment of certain conditions precedent, which include requisite prior approval PTI< from IRDAI, it said. Now, Japanese firms set sights on Indian realty Mumbai, 17 March SHALLY SETH MOHILE Mumbai, 17 March Accor Hotels, Europe’s largest hospitality group that forayed into India a decade back, does not consider OYO Hotels as its immediate rival considering the differentiated positioning the two have in terms of price and business model. It is, however, fully cognizant of the OYO’s growth and expansion plans. JeanMichel Cassè, chief operating officer, India and South Asia of Accor Hotels, said he won’t be surprised if the French major finds the six-year-old homegrown brand snapping at its heal very soon and coming close to Accor’s core business. “I don’t think OYO is a rival as their business model is completely different. We are not playing in the same price game. However, I cannot say blindly that they are not a rival. If we look at their size, their growth, we don’t know where they will be heading tomorrow,” Cassè said. In a very short span, the Ritesh Agarwal-founded start-up has emerged South Asia’s largest hospitality chain valued at $5 billion having its presence in 10 countries. The Soft Bank-backed firm has charted an aggressive expansion plan across geographies and has ambitions to become the world’s largest hotel company overtaking Marriott by 2023. OYO’s agile approach has been its strength, said Cassè. “They are very flexible, very fast and are very quick in shifting strategies according to where the winds take them, in their best interest. So, I won’t be surprised to see OYO coming very close to what is our core business today,” he said. Meanwhile, the owner of ibis, Sofitel, Banayan Tree, among other brands, has its hands full executing the expansion for the India market. In the works are 20 hotels that will come up over the next n Mitsubishi is in talks with J Embassy Group to build commercial properties in South India n The companies are also looking to invest in industrial parks n Mitsubishi has a team of 2-3, Sumitomo has 8 to 10 n Sumitomo Realty & Development is looking apanese real estate players have set their sights on the Indian commercial property space after the American and Canadian investors. Sources in the know said big conglomerates of Japan, including Mitsubishi Corporation, Sumitomo Corporation, and Mitsui Group, are looking to both build and buy commercial properties in key Indian cities. “Mitsubishi and Sumitomo are looking to buy and hold the properties for long and earn rental yields,” a source, who is working with both the conglomerates in the country, said. According to the source, Mitsubishi is in talks with Bengaluru-based Embassy group to build commercial properties in southern India and is in negotiations with other developers for similar tie-ups. Mails sent to Mitsubishi and Sumitomo did not elicit any response till the time of going to press. Jitu Virwani, chairman of Embassy group, declined to comment, too. Mitsui group could not be contacted for comments. The companies are also looking to invest in industrial parks, like Warbug Pincus of the US has. While Mitsubishi has a team of two to three executives in India for commercial properties, Sumitomo has 8-10 people. Its real estate arm, Sumitomo Realty & Development, is also looking to develop or do joint ventures with Indian firms for commercial properties. Early last year, Sumitomo had tied up with auto components maker Krishna group for a mixeduse project in the National Capital Region (NCR) and for other mixed-use projects in the country. Mitsubishi’s investment arm had also put in money in Shriram Properties' project in Chennai last year. In September, Surbana Jurong, Singapore governmentbacked Temasek Holdings’ subsidiary, and Mitsubishi annou- IN TOP GEAR MAY 2013: Honda phases out the 8th generation Civic February 15 2019: Commences bookings for the 10th generation model March 7, 2019: The all-new Civic goes on sale 1,600-plus Bookings in a month Up to 550 Average monthly sales of D segment (premium sedans) SHALLY SETH MOHILE Mumbai, 17 March A month after Honda opened bookings for its 10th generation Civic, the local arm of the Japanese carmaker has managed to garner bookings for more than 1,600 units, three times the monthly sales in the segment, a top company official said. Honda launched the Civic on March 7 and accepted bookings for the model from February 15. The prices start from ~17.70 lakh to ~21 lakh (ex-showroom, petrol variant). “The response to the Civic has been phenomenal. The bookings that we have for the first ARINDAM MAJUMDER New Delhi, 17 March JEAN-MICHEL CASSÈ, COO, India and South Asia of Accor Hotels five years and add to its inventory of 52 hotels and 9,500 rooms across all its brands. Accor expansion strategy will include ‘densify’ presence in 22 cities through Novotel and Ibis across the economy and mid-scale segments and further tap the luxury segments. Accor has become the second-largest operator in the luxury space globally after the acquisition of Fairmont, Raffles, and Swissotel a few years ago and Movenpick last year. It is giving the firm more opportunity to bring these brands to India, he added. “In key cities, we are looking to grow our luxury network by growing brands such as Fairmont and Sofitel. We are also aiming to bring our ultra-luxury brands like Raffles to India,” Cassè said. More on business-standard.com https://t.me/TheHindu_Zone_official nced a tie-up on urban building projects across Southeast Asia, with plans to recruit other partners for $2.5 billion in developments over five years. Their plans included rail and roads, housing, shopping centres, hospitals, and other community building blocks. They plan to do projects in Myanmar, Vietnam, Indonesia, the Philippines, India, and Sri Lanka. Mitsubishi has presence in automobiles, agro chemicals, and elevators in India. “Commercial real estate is witnessing a significant interest with all foreign and domestic equity players. The valuations are pretty stable and attractive, and the success of the upcoming Reit offering of Blackstone-Embassy would provide further depth in the market in terms of entry and exit,” said Shobhit Agarwal, managing director of Anarock Capital. Indian commercial real estate has seen the likes of US-based Blackstone and Canada’s Brookfiled and CPPIB investing heavily. Both have invested about $5 billion in commercial properties here. Of the total $4-billion investments that have come in the sector in 2018, nearly 44 per cent are from foreign investors, primarily from the US, Canada, and Singapore. Also, over 90 per cent of the foreign investments have preferred commercial projects across Mumbai, Pune, Bengaluru, and Hyderabad, said a report by KPMG last year. month are more than three months’ sales of the segment,” said Rajesh Goel, senior vice-president and director for sales and marketing at Honda Cars India. He said there had been a lot of interest from cross section of customers, including existing owners, many of whom are celebrities and have held on to the older generation Civic and wanted to upgrade. Close to 85 per cent of the demand is for the petrol variant. Also, eight out of every 10 bookings received so far are for the top trim levels of petrol and diesel. The Civic competes with the Skoda Octavia, Toyota Corola Altis and Hyundai Elantra. With its large wheels and thickest tyres, it hopes to wean buyers off the SUV segment. It should be a good choice for those looking to upgrade from the lower D segment unless someone is absolute- ly keen on an SUV, said Goel. The upper D segment of the car market, as classified by the Society of Indian Automobile Manufacturers, comprises sedans and (4500 mm-4700 mm) with an engine size of up to two 2 litres. In the absence of launch of completely new models and buyer preference shifting to SUVs, the segment has lost its sheen. In the year that ended in March 2018, the segment sold a total of 10,350 units against 11,730 units a year ago, according to Siam. With many models being discontinued, the segment size has shrunk to 540 to 550 units a month. The Civic returns to India after a hiatus of six years. Faced with unfavourable exchange rates and capacity constraints, Honda pulled the plug on the Civic in 2013 and skipped the ninth generation for the Indian market. RAM PRASAD SAHU Mumbai, 17 March Mindtree’s plan to buy back shares will make picking stake an expensive proposition for Larsen & Toubro (L&T). L&T is in talks with the single-largest shareholder in Mindtree, V G Siddhartha of Café Coffee Day group, to buy his 20.41 per cent stake in Mindtree. At the current price, the stake would cost L&T around ~3,300 crore. Mindtree is already trading at two times its enterprise value (EV) to revenues and the buyback at an expected at a price of ~1,000-1,200 would take the share price even higher, according to analysts. G Chokkalingam, managing director of Equinomics Research and Advisory, said anything beyond the current price will make it an expensive deal for L&T, given there are other IT firms available at 1-1.5 times their EV to revenues. Once L&T buys Siddhartha’s stake, it could also look at acquiring the 10.61 per cent stake of foreign investor Nalanda (India Fund and India Equity Fund), which will take its stake to over 30 per cent. This could then trigger an open offer, given the threshold for the same is 25 per cent. While the deal is expensive, L&T has set high targets for its IT services businesses — L&T Infotech and L&T Technology Services. The L&T group plans to break into the top five Indian IT services companies and is expecting 30 per cent of the group’s turnover from IT services, so paying a premium for a controlling stake in Mindtree might not be an issue for them. Given its surplus cash, L&T Infotech had plans for a buyback and had not deployed the same so far. This cash (of over ~2,000 crore) could come handy now. For the founding promoters of Mindtree, the buyback is an attempt to stall the takeover. Their stake in Mindtree, at 13.3 per cent, is expected to move up if they don’t participate in the buyback as the equity base will shrink. An IT analyst at a domestic brokerage said: “In terms of service verticals and geographies, Mindtree is similar to L&T Infotech. The same promoter with two businesses, which are competitive to each other, is not a model they would want to follow. They will have to merge L&T Infotech and Mindtree leading to a change in top management at Mindtree.” For the current management of Mindtree, the private equity players are the only ones who can now queer the pitch for L&T by offering a higher price for a stake in the company. The biggest beneficiaries of the takeover battle between L&T and Mindtree founding promoters could be Siddhartha and the minority shareholders. Analysts said the stock price will move up over the coming weeks if the battle heats up. They said if the buyback price is upwards of ~1,200, investors should tender their shares, because, at this level, the stock will be priced at 21 times one-year forward earnings, which is its peak valuation as compared to the current levels of 17-18 times. NIIF yet to take a call on investment in Jet The sovereign fund has not approved a plan or initiated due diligence They (OYO) are very flexible, very fast and are very quick in shifting strategies according to where the winds take them, in their best interest. So, I won’t be surprised to see OYO coming very close to what is our core business today to develop Indian properties or form joint ventures to do so n Early last year, Sumitomo tied up with auto components maker Krishna group to do a mixed-use project in the NCR n Mitsubishi’s investment arm has put money in Shriram Properties’ Chennai project Civic races ahead in 1st month of bookings units OYO not our rival as of now: Accor Hotels India COO ON THE CARDS RAGHAVENDRA KAMATH Mindtree share buyback to make takeover costly While lenders to Jet Airways are looking for a faster resolution to the crisis, the National Investment and Infrastructure Fund (NIIF) is yet to decide if it will invest in the distressed carrier. Sources said the board of the sovereign fund held two meetings over investment but did not approve any plan. “The board meetings were inconclusive. There was opposition from at least three members, which stalled the (investment) approval process,” said a person aware of the development. The board of NIIF has six members, which includes finance secretary Subhash Chandra Garg, IAS officer Rajaraman Kalyanraman, and NIIF Chief Executive Officer Sujoy Bose. The rest of the members are private sector executives like Sanjay Bhandarkar, an investment banker, HDFC Chairman Deepak Parekh, and Tata Sons veteran Ishaat Hussain. “The NIIF has a stringent policy to identify sectors and entities where it would like to invest. It then does a thorough due diligence. The process can take more than month. In Jet’s case, a due diligence process hasn’t been initiated yet,” the person familiar with the matter said. Bose did not respond to queries about the matter. The NIIF’s indecision is critical because, according to the deal signed between Etihad and Jet promoter Naresh Goyal, a new investor was to infuse between ~1,600 crore and ~1,900 crore to hold about 20 per cent stake in the company. According to the agreement, the consortium of lenders, led by the State Bank of India, will convert its dues into shares and pump in an additional ~1,000 crore STANDSTILL n Resolution plan envisaged n NIIF board met twice but NIIF to pick up 20 per cent stake at ~1,600 crore n Etihad Airways’ board yet to sanction the resolution plan didn’t approve the plan n At least three directors have opposed the plan of investing in a loss-making sector to raise its stake to 29.5 per cent. Etihad was also expected to infuse ~1,600 crore to raise its shareholding to 24.9 per cent. The NIIF was approached by the lenders after the Abu-Dhabi carrier, which holds 24 per cent stake in the company, refused to increase its stake beyond 25 per cent without an exemption from open offer. The Carrier may gain from JetPrivilege’s success SURAJEET DAS GUPTA New Delhi, 17 March Its annual revenue is merely the equivalent of about 10 days’ income of Jet, but JetPrivilege, the associate firm which runs the frequent flier programme, has emerged as a trusty steed in this time of crisis. Cash-strapped Jet is finalising a memorandum of understanding with joint venture partner Etihad. According to the deal, Jet is pledging its entire shareholding of 49.9 per cent in JetPrivilege to raise a loan for multiple urgent needs. The airline has to pay off its lessors (59 planes are grounded due to non-payment), employee salaries, and vendors to stop being grounded. Under the terms of the MoU, the airline is pledging 34.9 per cent of its shares in JetPrivilege to secure an interim loan from bank lenders and from Etihad of ~1,500 crore. It is offering the remaining 15 per cent as security for a loan of $140 million from HSBC which should have been paid in full by the end of this month but which looks as though it might be defaulted. So why is JetPrivilege so valuable? In 2017-18, the company clocked up revenues of ~622 crore but made a net profit of ~106 crore. In the same period, Jet made revenues of ~24,000 crore but slumped into the red with a stand-alone loss of ~768 crore in FY18 after a profit of ~1,482 crore in FY17. The contrast in status can be seen in how the two are valued by investors. Jet, for instance, currently has a market cap of merely ~2,679 crore which has been eroding fast. JetPrivilege, which is not listed, has received some awesome valuations: in 2017, Onpoint, a global agency that ranks airline loyalty programmes, valued JetPrivilege at $1.1 billion and ranked it 31 in the most valuable airline loyalty programmes globally. Etihad’s loyal programme was ranked 38 with a valuation of only $765 million. In October 2018, private equity funds such as TPG and Blackstone which were looking at buying Jet’s stake in JetPrivilege, after an offer from the airline, valued the company at around $900 million — a slight erosion which indicated the seeds of the financial crisis now engulfing Jet. Analysts peg the valuation currently at around ~5,000 crore. Despite the bumpy journey of the airline, JetPrivilege has been cruising smoothly. Set up in 2012 as a fully owned subsidiary of Jet, it first came to rescue of the airline in 2014 when founder-chairman Naresh Goyal decided to rope in Etihad as a partner to ease his financial stress. Etihad pumped in $600 million to take a 24 per cent stake in Jet and a 50.1 per cent stake in JetPrivilege https://t.me/TheHindu_Zone_official at a value of $150 million. An abortive attempt to sell off part of Etihad’s equity was made last year but shelved. Instead, Jet dug into JetPrivilege to raise ~250 crore from advance sale of redemption miles to the associate company. While Jet pays JetPrivilege for accrual of the miles, JetPrivilege pays Jet when they are redeemed. The loyalty programme has soared from 2.6 million members and 72 programme partners in 2013 to over 9.5 million members and more than 144 programme partners by the beginning of 2019. In just one year, through an aggressive campaign, JetPrivilege won over two million new members. The airline, in its analyst call for the Q3 of FY19, said that membership has been growing at 26 per cent. The number is significant as there are over 300 million active airline loyalty members globally, according to estimates. Securities and Exchange Board of India did not agree to the idea. Goyal had earlier reached out to Lulu group owner Yusuff Ali M A for infusing cash into the carrier, but the plan didn’t materialise. The NIIF is backed by India and was established to provide long-term capital to the country’s infrastructure sector. Budget 2015 set the ball rolling for its creation and NIIF was set up as an alternative investment fund in December 2016, with a planned corpus of ~40,000 crore. The Indian government has a 49 per cent stake in NIIF with the rest held by marquee foreign and domestic investors such as Abu Dhabi Investment Authority, Temasek and HDFC Group. An early resolution to the financial woes is crucial for Jet. More than 50 planes have been grounded by lessors due to non-payment of lease rentals, while it has defaulted on interest payment to domestic and foreign lenders and delayed salaries to pilots. Now, Jet cuts flights to Gulf Jet Airways has suspended services to Abu Dhabi and slashed the number of flights to Dubai till March-end. According to a notice from Etihad Airport Services, the airline has cancelled all its flights from Monday for operational reasons. It has also stopped DelhiDubai flights. “The airline has been committing lessors and vendors regarding payment and has not been able to meet them till now. The airline management is looking to raise funds and clarity would be available in next few days,” said a source familiar with development. “Jet has proactively undertaken certain operational adjustments to its flight schedule, keeping in mind the likely, yet interim non-availability of some aircraft in its fleet in the foreseeable future. The airline has kept the regulator as well as its guests informed of these changes,” it said in a statement. ANEESH PHADNIS https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official 4 ECONOMY 1 MUMBAI | MONDAY, 18 MARCH 2019 > Panel on cards to ensure no turf war among CCI, other regulators CCI may soon engage with Centre, states in formulating policies so that competition is not affected VEENA MANI New Delhi, 17 March T he Centre is planning to set up a separate forum of regulators to ensure that there is no turf war between various regulators and the Competition Commission of India (CCI). The Telecom Regulatory Authority of India (Trai), Central Electricity Regulatory Commission (CERC), Insurance Regulatory and Development Authority (Irdai) and Petroleum and Natural Gas Regulatory Board (PNGRB) will be part of this forum, which will resolve disputes with the CCI. A senior official said, “These regulators can meet and address competition-related issues through dialogue and discussions. This issue of overlap between sectoral regulators and the fair trade regulator has been going on for a long time. There have been cases where PNGRB, Trai and CERC have been at loggerheads with the CCI.” A recent instance of the CCI’s jurisdiction being questioned is that of the three telecom companies Bharti-Airtel, Vodafone India and Idea Cellular. The CCI alleged that these firms had WHO DOES WHAT They look into SECTOR REGULATORS issues before CCI they crop up Looks into issues such as abuse of position Issues that affect players Issues that affect public at large formed a cartel. The matter went to the Supreme Court, which held that the CCI should wait for the telecom regulator to complete its investigation. In one instance, Reliance Industries alleged that its rivals Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Quality of service provided Quality of service does not come under its jurisdiction Hindustan Petroleum Corporation Ltd (HPCL) formed a cartel for the supply of aviation fuel to Air India. However, during the course of the investigation by the CCI, IOCL, BPCL and HPCL filed a suit in the Delhi High Court challenging the CCI’s jurisdiction claiming that the matter fell under Firstsetofbids under asset monetisation for IL&FS today PRESS TRUST OF INDIA New Delhi, 17 March the jurisdiction of the PNGRB, the sector’s regulator. Experts suggest that while sectoral regulators act before problems occur, the competition law addresses anti-competitive activity after it occurs. The CCI investigates complaints it receives or can take up cases suo moto if it feels there is anticompetition activity. The government is planning major amendments to the Competition Act, which entails changing the definition of “relevant market” and altering the threshold for mergers and acquisitions. The committee set up will look into changes needed in the Act. The panel is also deliberating whether there is a need to have a separate division in the commission to examine mergers and a separate one to examine anti-trust cases. The government has been planning to expand the role of the CCI by making it a body that will engage with the Centre and states in formulating policies and revising them so that competition is not affected. The government also wants the CCI to be a think-tank that will analyse policy frameworks rather than only investigate cases and impose fines on those who violate the Competition Law. Cash-strapped IL&FS Group will receive first set of bids under asset monetisation process on Monday as part of resolution process, according to sources. The company’s board will later consider bids for ~8,000 crore renewable energy business that was put on the block in November 2018, the sources said. This will be the first set of bidsthat willbeopenedunder asset monetisation process as part of resolution process by government-appointed and Uday Kotak-led new board, they added. The group, which is sitting on the debt of about ~94,000croredebt,haddecided to sell assets in various verticals, including roads, education, renewable energy, and broking in November lastyear.Therenewableassets ofthegroupincludeoperating wind power plants with an aggregate capacity of 873.5-mw, and under-construction such plants with 104 mw capacity. Hedgers line up to gain from crash in forwards ANUP ROY Mumbai, 17 March Importers and foreign currency loan borrowers have increased their hedging, taking advantage ofthecrashinforwardpremium after the Reserve Bank of India (RBI) offered $5-billion swap facility with banks, according to currency dealers. The one-year forward premium for dollar-rupee was 4.11 per cent a month back, and 4.05 per cent a week back, but is now at 3.57 per cent. The premiums are likely to rise as more companies come forward to hedge. Forward premium is the fee a supplier of dollar takes to commit to supply dollar at the end of the agreed period. The central bank said last week that it would swap up to $5 billion of three-year dollars with banks.Theintentionistosupply rupee liquidity into the system. Most of the hedging is happening on long-term external commercialsegment(ECB),said currency consultants. “We are observing increased hedginginthemedium-tolongterm ECB segment,” said Samir RBI guv to hold pre-policy meet with traders on March 26 PRESS TRUST OF INDIA New Delhi, 17 March The Reserve Bank of India (RBI) Governor, Shaktikanta Das, will hold discussions on March26withrepresentatives of trade bodies and credit rating agencies on interest rate and steps to boost economic activities, said sources. The meeting, which comes ahead of the next financial year's first MPC meet scheduledforApril4,isaimed at broadening the consultation process, they added. The bi-monthly policy, to be finalised by the six-member Monetary Policy Committee, assumes significance as it would be announced just a week before the commencement of the seven-phase general elections beginning April 11. “The pre-policy consultation meeting” with the governor will take place in Mumbai on March 26, the sources said. Besides trade bodies, including industry chambers and rating agencies, the governor has also called representatives of the All India Bank Depositors’ Association. Das has been meeting industry chambers, non-banking financial companies, bankers, government representativesandratingagencies to elicit their views on aspects oftheeconomyandmeasures they expect from the RBI. Soonaftertakingchargeasthe 25th governor of the RBI in December2018,hehadpromised to take all stakeholders, including the government, along on key policy issues to maintain growth while keeping inflation under check. FPI INVESTMENT $-~ 1-YEAR ONSHORE FORWARD OUTRIGHT in $ million Inverted scale Data up to March 14, 2019 Lodha, managing director of QuantArt Markets Solution, a treasury management firm. “The RBI move helps ECB hedgers since their forward premium impact is significant. For regular importers with three to four months import cycle, the RBI swap impact is immaterial at 8-10 paisa,” Lodha said. According to Lodha, so far, importers have been relaxed with the appreciating rupee, but it may not remain the same after elections and the importers should take advantage of the strong spot movement from 71 to 69 a dollar to hedge. Source:NSDL Source: Bloomberg The time, though, is not so advantageous for exporters, but they also have enjoyed a good show last year when the rupee rapidly depreciated to reach its life time low of 74.15 a dollar in October. Currency dealers are advising their importer clients to buy forwards as much as possible at the present level, while telling exporters to not enter the market if they can afford to do so. The idea is that rupee would soon fall to 71 a dollar once the elections are over. Rupee’s stability, and appreciation in recent times STATSGURU Top gainers, losers after Sensex jump ON FRIDAY, the BSE Sensex closed above 38,000 for the first time since September 14, 2018. Since the beginning of this year, the Sensex has rallied 4.8 per cent, as shown in Chart 1. The recent rally has not been limited to just the large caps. In fact, as seen in Chart 2, even the beaten-down small and midcap indices have recovered of late. The Nifty Banking Index continues to outperform the broader market. But it is largely driven by private banks. As shown in Chart 3, the Nifty Private Bank Index has surged over the past year, even as the public sector bank index continues to languish. Over the past year, the major gainers have been Adani Power, followed by Bajaj Finance, Divi’s Laboratories, Aditya Birla Fashion and Muthoot Finance (Chart 4). On the other hand, the major losers have been DHFL, Reliance Power, Reliance Infra, Reliance Capital and Central Bank of India. Many have attributed the recent rally to the surge in inflows from overseas investors. As seen in Chart 5, over the past two months, foreign portfolio investors have pumped in close to ~32,000 crore in the Indian stock market. However, a closer look at the stock market data suggests that this rally isn't a one off. In fact, a report by KR Choksey shows that the markets often tend to rally ahead of elections. The report, which analyses data over the past 23 years, shows that the markets rise in the build-up and voting period between January and May and the post-election months of May to July (Chart 6). During these months, sectors such as IT, auto and capital goods tend to benefit the most (Chart 7). ISHAN BAKSHI ~ been strong. In equity, they have putin$2.44billion,andinbonds they have invested $833 million, on a net basis. The voluntary retention route (VRR), which cuts down holding period to one year from three years earlier, have been a major draw for the money. High bond yields (or lower price) at entry point, and low yields (or higher price) at exit points is what lures the investors in the fixed income paper. The bond market has managed to hold steady due to unprecedented secondary market bond purchases by the have also encourage foreign portfolio investors to pour in their money without hedging, currency dealers say. “They are coming without any hedging. Corporate bond yields are offering attractive return and there is a view that even if rupee depreciates, it won’t be more than 2-3 per cent, which is lower than the hedging cost, but that is dangerous tactics to take as the RBI can change tactics anytime,” said a treasury head of a private sector bank. So far in March, FPI’s investments in Indian markets have ISSUES AND INSIGHTS BANKER’S TRUST: $5-bn swap smartest move of RBI gov 8 > commercial transaction between the two contracting parties but shall not be excluded while determining the value of supply. In its circular (no. 09/2019- Customs) on ‘Turant Customs’, the CBIC mainly talks of incremental facilities by leveraging information technology to speed up imports and exports. The DGFT Policy Circular (no.19/2018) says that applicants should apply for Advance/EPCG authorisations as per current practice on DGFT website (www.dgft.gov.in). The Regional Authorities (RA) will not issue any hard copy of authorisation to the applicants. Instead, in case of approval by the RA the applicant will get a suitable message on his mobile and email address. RA will continue to examine the application as per current practice and, after approval, send the authorisation details to other agencies/ departments, as usual. The JNCH Public Notice (no.3/2019) asks importers to file advance or prior bill of entry in re-import cases and necessarily upload documentary evidence of surrender of export incentives and intimation to specified authorities. It says that where benefit of exemption is claimed, the ‘first check’ procedure need not be resorted to and identity of goods can be established under ‘second check’ procedure also. Under the RoSCTL, the benefit to exporters shall be given by the DGFT in the form of Merchandise Exports from India Scheme (MEIS) type duty credit scrips. Till finalisation of procedural details, claims filed under the existing scheme-codes for the erstwhile RoSL (Refund of State Levies) scheme will be treated as claims filed under RoSCTL scheme. Thus, the process of facilitating import-export trade is quietly proceeding as usual through a series of measures that may not individually amount to much but pursued diligently over a period of time, can collectively lead to reduction of transaction costs and improve the ease of doing business. EXIM MATTERS T N C RAJAGOPALAN The Central Board of Indirect Taxes and Customs (CBIC) has issued a useful circular clarifying various doubts regarding sales promotion schemes under goods and services tax (GST) regime. Another circular from its customs wing talks of introduction of next generation reform named ‘Turant Customs’ — a comprehensive package of various elements that would be implemented from time to time in the next few months. The Director General of Foreign Trade (DGFT) has discontinued issue of physical copies of advance authorisations and EPCG (Export Promotion Capital Goods) authorisations. The Jawaharlal Nehru Customs House (JNCH) at Nhava Sheva has rationalised the procedures for reimport of exported goods. The Ministry of Textiles has announced an improved scheme called Scheme for Rebate of State and Central Taxes and Levies (RoSCTL) on export of garments and made-ups. The CBIC clarifies that the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as ‘supply’ under GST (except in case of activities mentioned in Schedule I of the Central GST Act, 2007). However, input tax credit (ITC) shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to such supplies made without any consideration. Its Circular (no. 92/11/2019-GST) says that under schemes such as ‘buy one – get one free’, a single price is being charged for the entire supply and so, must be treated as supplying two goods for the price of one. It also clarifies that credit note(s) can be issued as a email : tncrajagopalan@gmail.com 1: BSE SENSEX CLOSES ABOVE 38,000 FOR THE FIRST TIME SINCE SEPTEMBER 14, 2018 2: SMALL AND MID CAPS ALSO RECOVER GROUND 3: PRIVATE BANKS CONTINUE TO GAIN WHILE SHARES OF PUBLIC SECTOR BANKS LANGUISH Source: BSE Note: Base Jan 1, 2018 = 100 Note: Base Jan 1, 2018 = 100 Source: NSE Source: NSE 6: MARKETS TEND TO RALLY BEFORE ELECTIONS Electionyear trend in the last 23years (1996-2019) PRE-ELECTION (P1) ELECTION (P2) POST-ELECTION (P3) Months Oct - Jan Jan - May May - Jul Returns Low/average Positive Positive/Above first Volatility Above average High Cools off Volumes Building up High Calms down FII/DII Sightly high High Average Source: 2019 Election Report, KR Choksey 7: IT, AUTO AND CAPITAL GOODS TEND TO GAIN THE MOST 4: TOP GAINERS AND LOSERS Price in ~ Mar 15, ‘18 Mar 15, ‘19 % Chg BSE 200 gainers Adani Power 28.15 50.60 79.75 Bajaj Finance 1725.80 2859.70 65.70 Divi's Laboratories 1086.10 1708.40 57.30 Aditya Birla Fashion 147.15 227.50 54.60 Muthoot Finance 397.30 597.80 50.47 BSE 200 losers DHFL 514.80 132.00 -74.36 Reliance Power 40.00 10.78 -73.05 Reliance Infra 449.65 131.30 -70.80 Reliance Capital 445.75 173.95 -60.98 CentralBankofIndia 87.10 34.00 -60.96 Source: BSE 5: OVERSEAS INVESTORS HAVE PUMPED IN CLOSE TO ~32,383 CRORE in ~ cr Sectoral returns during electionyears Outstanding >20% Average 10% -20% Neutral 0% - 10% Underperform <0% Particulars P1 P2 P3 Sensex -2.51 19.83 18.83 Auto 1.92 31.86 33.17 Banking & financial services 0.60 22.10 28.08 -4.23 28.84 33.50 Capital goods Consumption 5.62 13.19 20.72 Health care -7.85 25.35 2.05 Information technology 14.85 35.16 35.13 Metals & mining -0.84 13.19 27.78 Oil & gas Note: Data is till March 14, 2019; DII is domestic institutional investor, FPI is foreign portfolio investor Source: SEBI/NDSL/Exchanges StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines https://t.me/TheHindu_Zone_official RBI. At more than ~2.8 trillion, the purchases have been about 72 per cent of the net borrowing of the fiscal, but that may not be enough. More OMOs could be needed to keep bond yields in the lid, and dollar swap facility to infuse liquidity may not be a substitute, according to Soumyakanti Ghosh, chief economic advisor of State Bank of India group. “Frictional liquidity is substituting durable liquidity, which should never be the case. Durable liquidity can substitute frictional liquidity, but not the other way round. Against this, frictional liquidity injection through repo has more than compensated for the variation in government cash balances,” Ghosh said. The government usually builds up huge cash balances with the RBI as tax money pours in. This gets spent much later, and in between creates liquidity crisis, particularly at the end of every quarter. CBICclearsairon sales promotion offers under GST https://t.me/TheHindu_Zone_official -15.35 22.22 17.59 Power 2.08 4.70 5.84 Telecom 6.81 7.00 11.18 Source: 2019 Election Report, KR Choksey Source: Exports to Jobs: Boosting the gains from trade in South Asia, World Bank and International labour organization; Compiled by BS Research Bureau https://t.me/TheHindu_Zone_official 6 ECONOMY & PUBLIC AFFAIRS https://t.me/TheHindu_Zone_official MUMBAI | MONDAY, 18 MARCH 2019 > Some MPs in India represent up to 2.5 million people People-per-MPratiointhecountryamongworld’shighest INDIA HAS HIGHEST POPULATION PER MP SACHIN P MAMPATTA Mumbai, 17 March I ndia does not have enough representatives in Parliament. India ranks among countries with the highest number of peopleper-Member of Parliament (MP), shows data from across global legislatures. The peopleper-MP ratio in India is higher than global and neighbourhood averages. Research has shown that not having the right number of representatives can have a significant impact on policy-making. A study showed an average of one MP per 146,000 people globally. In India, the figure was ten times as much. There was one MP for every 1.5 million people. In fact, India had the lowest number of MPs relative to its population across democracies, shows data from a 2012 report by the Inter-Parliamentary Union, an association of national parliaments from across the world. One MP representing 1.5 million people is poor even by the standards of its neighbours. The Asia-Pacific region had one for every 313,000 people, twice the global average. (See Chart 1) The issue is unlikely to be the cost of maintaining an MP. Studies have shown that India spends amongst the lowest on Parliament. The per capita budget is $0.25 on a purchasing power parity basis, which allows for costs to be compared on an even basis across countries. (See Chart 2) There can be no increase in the number of members for some time. Parliament froze the figure at 545 (543, plus two nominated AngloIndian members) till 2026, based on the 1971 census. This was done to allow for population control measures to play out without skewing representation. This is because any increase in MPs will have to take population into account. Some states (especially southern ones) have been better than others in controlling their population. The amendment was because it was seen that states with better population control would be punished for their success, if states with higher population get more MPs. But meanwhile, the issue of not enough representation remains. If one were to take the Lok Sabha alone, even states with the highest representation, such as Uttar Pradesh, have one MP representing over 2.5 million people. (See Chart 3) Too few members can mean that policy is skewed in favour of some, noted a study of representation in 100 countries. “With too few representatives, public decisions could well be biased in favour of active minorities, to the detriment of under-repre- Inhabitants per MP (thousands) India 1,500.00 Asia-Pacific 313.25 Americas 156.73 World 145.88 Africa 83.43 Arab states 67.28 Europe 63.25 PARLIAMENT SPENDS AREN’T TOO HIGH Budget per capita (in $ on PPP basis) India 0.25 Bangladesh 0.26 Ethiopia 0.28 Pakistan 0.44 Lao People’s Democratic 0.97 Republic Note:Based on countries with least spends as per the report, based on purchasing power parity which allows for comparison across countries; PPP: Purchasing power parity Source: Inter-Parliamentary Union (Global Parliamentary Report-2012) EVEN BIGGEST STATES SUFFER FROM POOR REPRESENTATION Members Inhabitants per (16th Lok Sabha) MP (thousands) 80 48 42 39 38 Uttar Pradesh Maharashtra West Bengal Tamil Nadu Bihar 0.08 0.05 0.04 0.04 0.04 Sources: Lok Sabha website, Census 2011 numbers, Business Standard calculations sented (or less organised) groups. Casual observations also suggest that the corruption level could be higher in countries characterised by an “excessive” number of representatives,” according to a March 1998 article in Public Choice, titled ‘On the Optimal Number of Representatives’, authored by Emmanuelle Auriol and Robert J Gary-Bobo. It noted that too many members can create other problems. But that’s a worry that can wait till 2026. IN UNCHARTED WATERS VIRENDRA SINGH RAWAT Lucknow, 17 March In the backdrop of the sugarcane arrears in Uttar Pradesh (UP) topping ~12,000 crore, the cane belt of western UP, scheduled to witness polling in the initial phases beginning April 11, is likely to set the tone for elections in the country’s top sugarproducing state. UP’s sugarcane economy, estimated at ~40,000 crore, directly impacts nearly 4 million farmers’ households and has an intrinsic downstream integra- tion with the industry, especially sugar mills. The issue of sugarcane payments has always acquired political connotations, especially during elections. Even the ruling Bharatiya Janata Party (BJP) promised prompt cane payments in its election manifesto before the UP polls two years ago. The politics of the Ajit Singh-led Rashtriya Lok Dal (RLD) and Bharatiya Kisan Union (BKU) is largely centred around sugarcane and Jat issues. The RLD has aligned with the Samajwadi Party (SP) RUN-UP TO ELECTIONS 2019 and Bahujan Samaj Party (BSP) in UP and is attacking the state government on farm distress and the outstanding sugarcane dues. In the ongoing crushing season of 2018-19, the 119 operational UP sugar mills — 94 private, 24 co-operative, and one state — had procured cane worth ~23,200 crore from farmers and paid ~11,350 crore, thus leaving an unpaid portion of ~11,850 crore. Besides, mills have to make a payment of ~290 crore for the 2017-18 season. Earlier this week, UP Chief Secretary Anup Chandra Pandey summoned representatives of private mills and asked them to ensure full cane payments. A leading sugar mill official told Business Standard western UP mills had been directed to settle dues by the end of March, while central and eastern UP units had been asked to pay by the middle and end of April, respectively. Since polling in UP will start in the western pockets and progress towards the east in successive phases on April 11, 18, 23, 29, May 6, 12 and 19, the ruling BJP wants to ensure sugarcane payments are made as much as possible. N GEARING UP FOR POLLS N Source: Inter-Parliamentary Union (Global Parliamentary Report-2012) State SugarcanebeltstosettoneforLSpollsinUP P12 BJP steps up ‘Main bhi chowkidar’ campaign Cong calls off seat-sharing deal with Left in Bengal The Bharatiya Janata Party (BJP) on Sunday stepped up its ‘Main bhi chowkidar’ campaign. Prime Minister Narendra Modi, Finance Minister Arun Jaitley, and other party leaders, including president Amit Shah, prefixed the word chowkidar (watchman) to their names on their Twitter profiles to seek people's support in the upcoming elections. Many of them also put out short advertisementvideos showing people from differentwalks of life have turned chowkidar to do their bit for the country like Modi. Modi's Twitter profile identified him as ‘Chowkidar Narendra Modi’. “As chowkidars of our nation, we are committed to creating a clean economy by using cashless financial transactions. The menace of corruption and black money has adversely affected us for decades. Time to eliminate these for a better future. #MainBhiChowkidar #ChowkidarPhirSe,” Railway Minister Piyush Goyal tweeted. Shah tweeted a campaign video to highlight people's efforts to keep their surroundings clean. PTI The West Bengal unit of the Congress on Sunday called off seat-sharing talks with the CPI(M)-led Left Front for Lok Sabha polls, after weeks of hectic parleys failed to resolve the impasse over distribution of seats. “It has been decided by our unit that we don't want any adjustment or alliance by compromising our dignity. The Left can't dictate us on who will be our candidate and who won’t. We will fight it alone in Bengal,” state Congress chief Somen Mitra said after a party meet in Kolkata. The Congress was miffed at the CPI(M) announcing the list of its 25 candidates in the state, and had expressed the party's displeasure over the Left Front not respecting the rules of alliance. PTI Polling staff to walk for a day for lone voter in Arunachal Election personnel will hike through an Arunachal Pradesh district bordering China for a day to ensure Sokela Tayang — the lone voter of a polling station — can exercise her franchise. Tayang lives with her children in Malogam, around 39 kms from Anjaw in the Hayuliang Assembly constituency. “The polling station had two voters during the 2014 elections. Now, for some reasons, Sokela's husband Janelum Tayang has transferred his name to another polling booth,” sources at the state chief electoral officer’s office said. It will take a full day for the polling party — a presiding officer, polling officers, security personnel and porters — to reach Malogam polling station from Hayuliang on foot, Deputy Chief Electoral Officer Liken Koyu said. PTI Bihar NDA announces candidates for 40 LS seats The three National Democratic Alliance (NDA) constituents in Bihar — BJP, JD(U) and LJP — on Sunday announced the names of candidates for the 40 Lok Sabha constituencies for the upcoming general elections. (From left) LJP state President Pashupati Paras with JD(U) state President Vashisht Narayan, and BJP state President Nityanand Rai at the release of the candidates’ list in Patna on Sunday PHOTO: PTI According to the announcement, the BJP and the JD(U) will contest 17 seats each, while the LJP will contest six. MAJOR CONSTITUENCIES: BJP: Muzaffarpur, Patna Sahib, Darbhanga JD(U): Siwan, Gaya, Bhagalpur PTI LJP: Hajipur, Samastipur, Jamui > FROM PAGE 1 Centre may hike import duty... Other major players like Lloyd, Panasonic, and Samsung, too, have approached the authorities individually or through the industry body, Consumer Electronics and Appliances Manufacturers Association (CEAMA). Kamal Nandi, president of CEAMA and business head and executive vice-president at Godrej & Boyce, said, “Customs duty on components should not be increased any further as we don’t have the ecosystem for manufacturing these components in India. We fully support the government’s move to increase duty on finished goods, but we want Customs duty on components to go down.” Manufacturers, already gasping under the cost burden, pointed out that since mid2017, the prices of large appliances have had to be raised at least thrice – first, due to the higher tax rate under the goods and services tax; second, due to higher cost of raw materials like steel and plastics and the depreciation of the rupee; and third, due to duty hikes in September 2018. Sources said that with the country’s current account deficit (CAD) continuing to rise, the government is looking closely at items that can be taxed further. In JulySeptember 2018, India’s CAD rose to 2.9 per cent of gross domestic product, up from 2.4 per cent in the preceding quarter. Shashi Arora, chief executive officer of Lloyd, is unfazed about a probable duty hike on components for ACs. However, he wants the import duty on TV parts like open cells and panels to go. Incidentally, the imposition of a 5 per cent duty on open cells and a 7.5 per cent duty on flat panels last year led Samsung to move its manufacturing base from Chennai to Vietnam. While over 80 per cent of the compressors used in ACs and refrigerators continue to be imported, copper tubes for condensers and pre-coated steel sheets used in the outer cover of appliances like refrigerators are largely imported too. The components for microwave ovens and indoor units of ACs are imported from Europe and China. Hence, any further rise in the import duty of these components is bound to have a crippling effect on local manufacturing. Nandi said, “We are making representations to the government to bring down the 10 per cent duty on compressors. Besides, since the duty on other components like open cells (for TVs) can hurt local manufacturing, we are demanding a cut there.” LG’s Vijay Babu said, “We will wait and see what decision they take and determine our course of action accordingly.” He did not, however, specify what changes LG was planning if duties are hiked once again. With inputs from Subhayan Chakraborty Mindtree taps institutions... Singapore-based Arohi Asset Management Pte Ltd, which manages the Ontario Teachers’ Pension Plan Board’s stake of 1.22 per cent, is another major foreign institutional investor in the company. “The founders have reached out to all major institutional investors, including Nalanda Capital, as their support will be crucial in the case of management change,” a corporate governance official said. He, however, added a good premium over the market price would be the key deciding factor. Another source tracking the development pointed out that Mindtree is in touch with its top client base in the US and other geographies to get https://t.me/TheHindu_Zone_official validation of its work for bolstering its case before the shareholders. This is significant, as customer stickiness is critical in the IT services industry, an outsourcing advisor said. “The founders have the zeal to fight. They don’t want to leave the company, which they have built painstakingly over the years, towards the path of value destruction,” a source familiar with the development said. “So, all defensive strategies are being explored by them.” However, many believe that price is the critical element of ring-fencing the company from a takeover bid. “The management knows that price is the real game changer. If L&T tries to gain majority control in Mindtree at a significantly higher price than the market rates, its shareholders will ask L&T’s management about its implications,” another source said. Siddhartha, who is the single-largest investor in Mindtree, is in advanced stages of discussion with a clutch of entities, including private equity and L&T to offload his stake in the IT firm. But, with the founders’ reluctance to shed their stakes of around 13.32 per cent, the situation has turned tricky. Earlier in an interaction with Business Standard, Mindtree’s Executive Chairman Krishnakumar Natarajan hinted at the founders’ desire to drive the company in its next growth phase. “As far as strategic direction is concerned, we (the founders) have the conviction and confidence in the business and have a point of view as to how the future should be,” Natarajan had said. The IT services industry globally has seen very few instances of hostile takeover so far. Analysts say as IT services is a human resourceintensive business, any hostile takeover may create integration issues in terms of people and customers. Co-founder quits govt role to take on raiders Terming Mindtree a national resource, Bagchi said it has not been designed as an ‘asset’ to be bought and sold. “I need to be there in its time of difficulty. Hence, (I have taken) the hard decision to return,” Bagchi said. Mindtree faces the risk of management change as its largest shareholder is reportedly in talks with a rival technology firm to offload his stake. Bagchi, who co-founded Mindtree in 1999, returned to his native state Odisha in 2016, after stepping down from his role as executive chairman of the information technology firm. His return to Bengaluru may be seen a precursor to a bitter boardroom battle that the current management is preparing for in order to restrict any rival technology firm from coming on board. Maruticuts productionby aquarter Production at the local arm of the Japanese carmaker in March 2019 is estimated to be the lowest since March 2015, according to the production data notified by the company to the stock exchanges and Society of Indian Automobile Manufacturers (Siam). Production shows a deaccelerating trend on a sequential month-on-month basis. In February 2019, Maruti produced 148,000 vehicles. The cuts come amid flagging sales. In the 11 months from April to February, Maruti’s domestic sales grew 6.7 per cent. Auto companies in India count despatches to dealers as sales. Most of the growth, however, came in the first quarter of 2018-19, when despatches in each of the three months advanced at more than 14 per cent. Since June 2018, sales have remained muted or in low single digits every month. “Whatever was planned six months ago has not worked and sales have been falling month after month. In a departure from the earlier plan of closing the year with 2 million units, the company may just do 1.87 million as the second half has been flat for the company,” said a Maruti Suzuki supplier. “It is a sign of a large system inventories that a production cut is necessitated. However, what is alarming is that the company is struggling with inventories for close to six months now,” said Mahantesh Sabarad, head, retail research, SBICAP Securities. With every second passenger vehicle sold in India coming from Maruti Suzuki’s stable, the company’s lacklustre sales in recent times reflect the slowdown in India’s broader passenger vehicle market. A combination of factors, including the tightening of credit norms by financiers in the aftermath of the Infrastructure Leasing & Financial Services crisis, higher ownership costs, including increased premium on insurance and higher fuel prices, slower economic growth, and a volatility in the stock markets have weighed on buyer sentiment. Between April and February, sales of passenger vehicles in India advanced by 3.3 per cent to 3.09 million units over the same period a year ago, according to Siam. Bracing for the lull in https://t.me/TheHindu_Zone_official demand and pile of unsold stocks, every other two-wheeler and car company has been paring production, said a top official at an auto component maker that counts leading automakers as its clients. He estimates production cuts across all the manufacturers to be in the region of 5 per cent to “India’s passenger vehicle market is facing a challenging business environment, with urban sales declining and rural sales growth coming close to single digits in the past few months. A few regions witnessed a higher monsoon deficit, impacting the rural economy, which, in turn, has dragged down demand over the last four to five months,” said Mitul Shah, vice-president, research, Reliance Securities. Binny Bansal... According to him, xto10x Technologies leverages technology and process-automation systems for founders to take on business operations seamlessly. “One reason (for his move) is that he intends to play a larger role in the start-up ecosystem. He wants to increase his engagement in his recently floated venture xto10x Technologies, which will provide technology tools and a learning platform for start-ups all over the world to scale up,” said a source familiar with the development. With Flipkart being registered in Singapore and many of its investors based there, Binny already has a strong network to start with. Even as he moves to Singapore, he will be frequently travelling to India, at least for work trips, sources clarified. Binny has angel investments in over 40 start-ups, commitments to a handful of home-grown VC funds, and a 4 per cent stake and board seat in Flipkart. Regarded as the poster boy for India’s start-up landscape, Binny, along with his Indian Institute of Technology batch- mate Sachin Bansal, founded and grew Flipkart to be top start-up from India. In May last year, the founder agreed to sell 77 per cent of stake in the etailer to US major Walmart Inc. for $16 billion, in the biggest ecommerce deal anywhere in the world. While Sachin sold his stake during the deal, Binny stayed on and was made the chairman of the board and group chief executive. But, a few months later, Walmart revealed an internal investigation that uncovered “serious personal misconduct” on his part that led to his resignation. According to media reports in December, Binny may have secured $100 million as part of his severance package, and as per contract will make more in 2020 when Walmart will buy part of his 4-4.5 per cent stake in Flipkart, which will be worth $850 million at the time. During and after Flipkart, Binny has been an active investor. He has stakes in an array of start-ups, including CureFit, GreyOrange, Ather Energy, Inshorts, and Creo, and VC funds pi Ventures, Blume Ventures, and India Quotient. Forbes estimates his net worth at $1 billion. SpiceJetlikely to operate grounded Jet aircraft Regulators around the world have suspended flights of 737 MAX planes following the Ethiopian Airlines crash last Sunday. The MAX’s earlier variant, known as the NG series, continues to be the mainstay for carriers around the world, including Air India Express, Jet Airways and SpiceJet in India. A SpiceJet executive confirmed the airline had a meeting with lessors on Saturday and is finalising the number of aircraft it intends to take. SpiceJet and Jet Airways fly the similar Boeing 737 NG air- craft but with a separate configuration. “As of now there are 13 planes grounded. We had planned to induct at least 15 more by the end of 2019. We are looking at the grounded Jet Airways planes to dry lease them for six months,” the executive said, adding that the airline was eyeing wet leasing planes from European carriers. In wet lease, an arrangement under which an airline leases aircraft along with crew, maintenance from the lessor is costly and will lead to a spike in operational cost for the company, which had recently started enjoying cost benefits from the fuel efficiency of the 737 MAX. According to the company’s statement in OctoberDecember, owing to a lower fuel burn of the aircraft, its cost increased only 2 per cent while the jet fuel price had increased by 6 per cent. A second SpiceJet executive said the airline was engaging with Boeing to understand how long the grounding of the MAX would be before taking a decision on leasing Jet Airways aircraft. “As of now it looks like it will be two months that the planes will stay grounded. We will not put a brake on our expansion plans or surrender the airport slots,” he said. A deal with SpiceJet will be a win-win for the lessors and the airline. For SpiceJet, getting Jet Airways’ aircraft means that they will come a lot cheaper than at the existent market rates and clearance from the regulator, Directorate General of Civil Aviation, will come quicker because the planes are registered in India. “Getting the planes will be faster and it would be cheaper than the existing market rate as the lessors will try to find a home for the aircraft after termination of the deal,” said a SpiceJet executive. The grounding of the MAX will increase the demand of NG and increase its rate by around 10 per cent, said an aviation consultant. More on business-standard.com https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official START-UP CORNER 11 1 MUMBAI | MONDAY, 18 MARCH 2019 > Carving out a niche in online insurance space A quick and cheap source of auto parts SHAMEEN ALAUDDIN Acko sells insurance — mainly automobile and innovative products — online at a lower price, but needs to build the brand, writes Gireesh Babu S anjay was going on a long road trip and UrbanClap. Last week, the company raised $65 and he had only one day to renew his car insurance. With no time to million in Series C round from several waste for an insurance agent to turn up, investors, including Binny Bansal, cohe decided to renew his car insurance founder and former CEO of Flipkart and online and reached a website that offered Intact Ventures Inc — the corporate venhim a scheme at a surprisingly low pre- ture arm of Canada’s largest property and casualty insurer. Amazon mium. After a quick web check on the credibility led the company’s Series B F A C T B O X round of funding, a $12 milof the site, he decided to lion investment, last year. buy the insurance. And LAUNCH: with Sanjay's purchase, Acko has raised $30 million November 2016 from investors, including Mumbai-based fintech AREA OF BUSINESS: Kris Gopalakrishnan, costart-up Acko General Digital native insurer Insurance, a native digital founder of Infosys, and Narayan Murthy’s insurer or that sells its own TARGET: To expand Catamaran Ventures. products, had received one physical presence to 30 more customer. Bansal said technologycities in two years; led insurance is likely to Acko breaks the clutter serve 100 million play a key role in growth of through the traditionally customers in 3-4 years middlemen-driven, comthe insurance sector in India and Acko is posimission-loaded insurance business in the country, by offering poli- tioned well to encash this opportunity. cies online, which should help it scale faster. It offers passenger car and two- Concept wheeler insurance and innovative prod- Varun Dua, former co-founder of ucts in the tie-up with online companies, Coverfox.com, is the founder of Acko. The such as Amazon, Ola, Zomato, redBus company, registered in November 2016 as Varun Dua, founder of Acko an independent general insurance company, received the IRDA’s approval in September 2017. It offers paperless purchase, cashless claim settlement and pick-up of the damaged car within one hour and end-to-end turnaround time of three days in certain cities. Acko is claimed to be the only digital native insurer, and the competition would be mainly from the established traditional insurance players which are expanding their digital footprint, Dua said It currently has a physical presence in 12 cities, while it operates pan-India online. Being online gives it an advantage of scaling faster and attract customers in their 30s, especially in tier I and II cities. The exclusive digital model gives it better access to data to assess good risks against bad risks, which should help it personalise the product and price accurately. E X P E RT TA K E Acko will need to woo more investors PANKAJ NAIK,XXX Executive Director and Co-head, Digital & Technology Investment Banking, Avendus Capital Indian general insurance is a large market poised to exceed $25 billion this financial year, yet highly underserved. We expect the general insurance market to cross the $50-billion mark by FY25. General insurers today face structural challenges such as information asymmetry, intermediary dependent distribution, branch-led https://t.me/TheHindu_Zone_official geographic expansion and physically-intensive operations. Acko’s differentiated go-tomarket has inherent advantages over traditional models. The company uses a direct-toconsumer approach for distributing motor and health products, allowing for favourable risk selection and superior underwriting. Acko’s success is representative of the power of technology-driven business models. Insurance is a capitalintensive business, therefore, will continue to require investors who are aligned with Acko’s growth plans. The next one-two years will be critical for the company to build the brand and attract high-quality customers seeking intuitive purchase experience, cheaper prices and stress-free claims experience. It also helps the company bring in new products, especially built target customers. Apart from automobile insurance, which it offers directly to the customers, the company offers products in collaboration with third parties, like small accident and missed flight insurance schemes. “In 75-80 per cent of cases, customers will find us 15-30 per cent cheaper than the other options that are available in the offline world,” said Dua. It has, so far, covered around 200,000 cars and has served a total of 20 million customers through its businesses. Opportunities and challenges The general insurance industry is estimated to be around $25 billion and it expected to grow by around 15-20 per cent since the penetration is low at around 0.9 per cent of GDP. In the next five years, it is expected to be a $60-billion market. Online insurance is around 5-6 per cent of the overall market and the growth is around 40-50 per cent every year. In 2014, it was 1.5 per cent online, said Dua. In the next five years, digital presence could be 10-15 per cent of the total market. The online insurance market could be worth $8-10 billion insurance at that time, he said. The challenge could be that there are over 20 established offline players trying to harness technology to bring down their costs and attract more customers. It is a deep capital business and the growth would come with investment. Road ahead The fresh funds will be used into brand building and on digital technology by adding more manpower in the technology front. “We will also be looking at health insurance sometime next year,” he added. https://t.me/TheHindu_Zone_official Pune-based Dilip Londhe was looking for replacement brake pads and sensors for his BMW 3-Series car, but the automobile parts were too expensive. He then stumbled upon the website of SparesHub — an automobile parts start-up — and found that prices quoted there for spare parts were "reasonable" and decided to purchase the items immediately. The start-up solves the problem of the unavailability of automobile parts and provides them at a cheaper price, helping car owners save precious time, money, and effort. The Pune-based company has recently raised ~3.5 crore from Indian Angel Network in its third round of funding. Besides selling auto spare parts through its website, SparesHub works with automobile companies and component manufacturers to make auto parts available to customers through service centres, fleet owners, service aggregators, and insurance companies. Founded by Tapas Gupta and Arijit Chakraborty, the start-up works with 250 B2B companies in Pune. “We solve the problem of over-expensive and unavailable automobile parts. We not only provide them at cheaper rates but make them available to the customer in 120 minutes,” says Gupta. Using data analytics, the company studies the vehicle ownership pattern in Pune to decide on its inventories. It then buys spare parts from original part manufacturers across India. "There are around > 26 companies with more than 100 models and approximately 350 replaceable parts," says Gupta. Opportunity The company pegs the total market opportunity for spare automobile parts at $2.8 billion and aims to tap 10 per cent of this market in the next five years. However, with electric vehicles on the rise, vehicle technology is itself changing. Not only are vehicles lasting longer, with longer service intervals, but there are fewer parts to maintain, replace, or repair, accord- ing to the August 2018 report, Ready for inspection: The automotive aftermarket in 2030, by consulting firm McKinsey. Besides, SparesHub faces massive competition from unorganised local workshops. Revenue & road ahead Four years into the business, SparesHub's per unit economics is positive and it hopes to achieve breakeven in four months. Currently catering only for Pune, it will utilise the fresh funds to expand to Mumbai, strengthen its technology solution and increase its 30-member team. BS SUDOKU # 2693 Medium: ««« Solution tomorrow SOLUTION TO #2692 HOW TO PLAY Fill in the grid so that every row, every column and every 3x3 box contains the digits 1 to 9 https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official 12 ISSUES AND INSIGHTS MUMBAI | MONDAY 18 MARCH 2019 > Is the IBC losing its effectiveness? On the contrary, it has the potential to change the behaviour of investors, lenders and borrowers to create a more healthy ecosystem for India Inc RAISINA HILL A K BHATTACHARYA T here is a growing concern that the Insolvency and Bankruptcy Code (IBC) has taken a bit too long in resolving cases of corporate indebtedness — much beyond the stipulated outer limit of 270 days. The fear, therefore, is whether the IBC will soon be rendered as ineffective as some of the similar laws like the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act, 1985 or even the winding up provisions in the Companies Act. A recent study, conducted by three researchers — Surbhi Bhatia, Manish Singh and Bhargavi Zaveri — provides a fresh perspective to this debate on whether the IBC is losing its effectiveness. According to the study, a resolution of a case within 180 days, the first deadline mandated in the IBC, is less than 5 per cent. The probability of resolution of cases increases significantly within 270 days, the second deadline under the IBC, upto between 10 and 30 per cent. And within 360 days of a case being admitted, the chances of resolution are even better at 30 to 70 per cent. These findings are certainly reassuring, compared to what the earlier studies had indicated. A 2018 study, led by Josh Felman and others had concluded that the 12 large cases, referred to the IBC by the Reserve Bank of India in 2017, could take more than 500 days and smaller cases could take up to 350 days for resolution. At around the same time, Ajay Shah and Susan Thomas came out with a study that suggested there was an 80 per cent chance that a case might not be resolved even after 270 days. Clearly, the study conducted by Bhatia, Singh and Zaveri has presented a more optimistic picture as far as the IBC’s effectiveness is concerned. Notably, this is also borne out by the data that the Insolvency and Bankruptcy Board of India (IBBI) put out early this year. According to the IBBI data as on December 31, 2018, as many as 1,484 cases have been admitted so far. Of these, 142 cases or 10 per cent have been closed on appeal or review. Sixty-three cases have been withdrawn, indicating how the borrowers’ behaviour has become more compliant once the cases are taken up under the IBC process. Seventy-nine or about 5 per cent cases have been closed after resolution. And 302 cases or about 20 per cent, have been closed after liquidation. Almost three-fourths of the cases that have been closed after liquidation are about companies that were either defunct or were languishing at the Board for Industrial and Financial Reconstruction, set up under the Sick Industrial Companies (Special Provisions) Act. This is also a reflection of how the earlier law had failed to bring about quick resolution and the IBC has succeeded in securing a relatively earlier closure for them. About 61 per cent of these cases — 898 in all — are under different stages of the corporate insolvency resolution process (CIRP). The IBBI data shows that about 30 per cent of them have been registered with the IBC process for more than 270 days. Another 18 per cent of the cases under CIRP have been registered for a period between 180 and 270 days. In other words, almost 48 per cent of the cases under different stages of CIRP have already crossed the second deadline for resolution under the law. This is what should cause concern. > Yet, there are several positive signals emerging from these numbers. One, the IBC process is certain to help India improve its ranking under insolvency resolution process in the 2019 edition of the World Bank’s Ease of Doing Business report. In 2018, the World Bank report had mentioned that resolution of insolvency in India usually takes about 4.3 years. The data now shows there is an improvement and whatever it is worth, India’s ranking in the World Bank Ease of Doing Business index should improve a few notches in 2019. Two, the IBC process is helping create greater certainty in the minds of investors as also lenders on the timeline for exiting businesses when they become unviable and have to be shut down. This is good news for a country where capital is scarce and needs to be freed up from unviable projects as early as possible. And three, the IBC process has already seen a positive change in the behaviour of borrowers, leading to greater compliance. It is reasonable, therefore, to suggest that the functioning of IBC so far has not got the kind of credit that is due to it. Not only has it outdone similar laws of earlier years, it has the potential of changing the behaviour of investors, lenders and borrowers to create a more healthy ecosystem for India Inc. Gunning for attention Is the Bharatiya Janata Party’s (BJP's) Patna Sahib lawmaker Shatrughan Sinha (pictured), who has an acrimonious equation with the leadership of his party, finally ready to quit? In a series of sharplyworded posts, he took on the government over what he alleged were “unfulfilled poll promises”. In one of the posts, he said, “You may be having many admirers but I won't be one of them.” In another, he sent out a warning that he might not stick around for long. In January, too, he had said he was ready to quit the BJP “at once”. He, however, had one condition — the party “high command” must ask for his resignation. $5 bn swap smartest move of RBI gov The new instrument could be a permanent fixture in the RBI’s liquid management toolkit, the level of the rupee determining the frequency of use BANKER’S TRUST TAMAL BANDYOPADHYAY I ndia’s banking regulator’s decision to hold a $5 billion three-year US$/Indian rupee buy/sell swap auction (on March 26) is driving forward premia down, paring the hedging cost of corporations for their overseas borrowings. This is one of the many outcomes of the Reserve Bank of India’s (RBI) latest liquidity infusion move through a unique instrument. Indeed, in the past too, the RBI had infused rupee liquidity using this route but that had been done (last time in 2013) in difficult times, when the local currency was under attack. This diversifies the liquidity management toolkit of the RBI. A cut in the cash reserve ratio (CRR) or the portion of deposits commercial banks keep with the central bank (on which they don’t earn any interest) is the conventional way of infusing liquidity on a durable basis. The RBI’s preferred way, in recent times, has been the so-called open market operations (OMOs): Buying bonds from the banks and releasing money. Through this auction, the RBI will buy dollars from banks and release equivalent amount of money — close to ~35,000 crore into the system for three years after which the banks will buy back the dollars from the central bank. To hedge against the likely depreciation of the rupee during this period, the banks will pay the swap cost to be decided at the auction. Even if the local currency depreciates more, the banks’ liability is fixed and the RBI too runs no exchange risks as it holds enough dollar assets and won’t need to buy dollar from the market three years later. In 2013, when the rupee was fast depreciating against the dollar and India was staring at its worst current account deficit, the banking system mobilised $26 billion through foreign currency non-resident bank account (FCNR-B) deposits to shore up India’s foreign exchange reserves. The RBI encouraged the banks to aggressively mop up such deposits (and get rupee in exchange of that) by offering a hefty discount to the prevailing $/Re swap rate in the market at a special window, kept opened between September 10, 2013 and November 30, 2013. These deposits matured in November 2016. We need to wait till March 26 to know the cut-off swap rate at the auction. Since the local currency is doing fine and there is no urgency to pile up foreign exchange reserves, the RBI is unlikely to offer any sops to the banks this time. In 2013, it had subsidised the swap cost as the context was different: We needed foreign exchange and the rupee liquidity was an offshoot of that. During the current fiscal year, the RBI has so far infused close to ~3 trillion in the system through the OMO route. Why has it chosen the new tool and what are the benefits? The liquidity is being kept lubricated through regular bond buying by the RBI but the liquidity deficit will intensify as typically in the run-up to a general election more and more currency seeps into circulation, leaving the system. Besides, corporations are paying their advance tax for the March quarter now. The currency in circulation was ~19.87 trillion in January, far more than the ~16.6 trillion a year ago. The credit deposit ratio in the banking system has been hovering around 78 per cent for months. This is high but even higher is the incremental credit deposit ratio — more than 100 per cent for quite some time. For every ~100 deposit, banks are to invest ~19.5 in government bonds and keep another ~4 with the RBI as CRR. But since deposit growth is tardy, they are using their entire fresh deposit and capital to lend. If this continues, the cost of money cannot come down despite a rate cut by the RBI. The timing of this experiment is apt as foreign currency has started flowing in through the newly opened voluntary retention route or VRR. The RBI in October 2018 announced this channel to facilitate foreign portfolio investment in the Indian debt market but the scheme, which is pretty liberal, was finalised in early March and it is attracting good flow. Besides, the National Company Law Apellate Tribunal giving the go-ahead to ArcelorMittal’s ~42,000 crore bid for the debt-laden Essar Steel will ensure another $6 billion flow. This will push up RBI’s foreign exchange reserves, currently at $402 billion. While the new tool will infuse rupee liquidity in the system, it will also bring down the hedging cost for Indian corporations raising money overseas. In other words, apart from generating liquidity, the new tool will also open up alternate source of funding for capital-starved Indian corporations, particularly those that want to make investments in new projects but not getting money from the local banking system. This may, however, stiffen the yield curve of government bonds at the longer end even as there should be a INSIGHT > GST on real estate: Transition is key M S MANI B oth consumers and builders were delighted with the reduction in the GST rates announced by the GST Council in a recent meeting. The reductions were quite impressive as the erstwhile rate of 12 per cent was brought down to 5 per cent and more importantly, the reduced rate of 8 per cent applicable to affordable homes was slashed to 1 per cent. There was expectedly a condition that the reduced rates would disentitle builders from taking input tax credit (ITC) on their purchases. The condition that ITC cannot be availed of by builders has led to some predicting an increase in real estate prices, especially in the case of affordable homes, instead of the expected reduction. At this stage, it is necessary to understand that, even earlier, in case of restaurants, the rate reduction was accompanied by a condition that no ITC was permitted. However, in case of restaurants, a large portion of the inputs such as grains, vegetables, fruits and milk do not attract any GST and hence the loss of ITC is only on some expense items such as rent and franchise fees. In the real estate sector, a significant portion of the inputs such as steel, tiles, sanitary fittings etc. attract GST at 18 per cent and cement attracts 28 per cent. The denial of ITC https://t.me/TheHindu_Zone_official 60 sq mt in case of metros and 90 sq mt for others, with a common value cap of ~45 lakh for all affordable housing projects. In these cases, while a rate of 1 per cent would be attractive for the buyer, the quantum of denial of ITC would determine whether there has been a significant dent to the builder and whether the builder would be compelled to marginally increase the price of the apartment, if permitted, to overcome the ITC loss. It is necessary for builders to pass the benefits of the rate reductions to the home buyers in terms of the mandate of Section 171 of the CGST Act, 2017, and his failure to do so would bring him in the crosshairs of the National Anti Profiteering Authority (NAA). In earlier cases, the NAA has consistently refused to permit netting off expenditure increases against rate reductions and has reiterated the intention that the benefit of a tax rate reduction has to be passed on to the consumer, even if other costs have increased. These principles would now be tested if builders do not bring down prices commensurate with the rate reduction made, on the plea that ITC denial does not allow them to pass on the entire benefit. The real estate sector has faced significant headwinds in the past few years in the form of RERA, demonetisation, working capital pressures etc. in addition to GST. While GST is one element in the overall picture, it is an important tool to revive an employment intensive sector like real estate and hence the Tuesday meeting of the GST Council, which is expected to finalise the transition provisions, will be keenly watched. The author is partner, Deloitte India Views expressed are personal Hot seat All of a sudden, the Pauri Garhwal (Uttarakhand) Lok Sabha seat is the cynosure of all eyes. Manish Khanduri, who is a son of former Uttarakhand chief minister B C Khanduri (pictured) and has joined the Congress over the weekend, is expected to be fielded from the seat, which his father, a retired major general, represents. There are at least three hopefuls from the Bharatiya Janata Party (BJP) side. National Security Advisor Ajit Doval's son Shaurya has been campaigning in the district for over a year now. Col (retd) Ajay Kothiyal is also seeking the BJP ticket. Rear admiral (retd) Om Prakash Singh Rana is a potential candidate listed by the BJP for contesting from the constituency. Khanduri senior has refused to contest the seat this time, citing poor health. liquidity-driven rally at the shorter end. The RBI’s continuous bond buying through OMOs has been keeping the long bond yield low. When the RBI sells dollars to stem the volatility in the foreign exchange market, it sucks out liquidity from the system (for every dollar it sells, an equivalent amount of rupee goes out of the system). And, when it buys bonds through OMOs to infuse liquidity, the yield drops. Why? Purely, a demand-supply game. When the demand for the bonds comes from the RBI, prices increase and yields drop. The OMOs help banks as they are able to get rid of illiquid securities without paying the price for it and make money. Incidentally, banks’ holding of excess government bonds has come down and many of them many not have enough securities to participate in OMOs. Indeed, they hold close to 26 per cent of liabilities in bonds against regulatory norm of 19.5 per cent but they need a large part of the cushion to conform to the so-called liquidity coverage ratio, leaving little to sell to the RBI. Given a choice, I think, the new instrument will be a permanent fixture in the RBI’s liquid management toolkit, the level of the rupee determining the frequency of use. The Indian currency is now trading at a level (closed at 69.09 to a dollar on Friday), far stronger than its historic low of 74.48 seen in October 2018. On the metric of real effective exchange rate, it is over-valued, making it an ideal situation for such a cool experiment. I’d say this is the smartest move of new RBI governor Shaktikanta Das since he has taken over. Room for appeal During a recent hearing in the National Company Law Appellate Tribunal (NCLAT), Chairperson Justice S J Mukhopadhyay expressed his anguish at the state of infrastructure provided to him. He went on to ask why, at the age of 70, he should work so hard when the government was refusing to provide adequate support.The NCLAT functions from a small office building in the CGO Complex. Despite many requests from lawyers and even directions from the Delhi High Court, there has been little progress on upgrading the NCLAT infrastructure. The columnist, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd. Twitter: @TamalBandyo LETTERS Interpreting Modi Tomorrow’s GST Council meeting, which is expected to finalise the transition provisions, will be keenly watched would certainly have an impact on builders. We also need to understand that a large part of the project cost would be attributable to the cost of land (which does not attract GST), which in some large cities could be as high as 50 per cent of the total cost. Hence the impact of the ITC denial would vary across projects with estimates putting the quantum of ITC anywhere between 3 per cent and 8 per cent. There are reports that some states would like to have an option of continuing with the earlier higher rates with input tax credit. There is also a need to consider the manner in which builders and home buyers would be taxed after April 1, when the new rates come into force. To finalise the transition provisions, a GST Council Meeting is scheduled for Tuesday, March 19. Home buyers, who have booked an apartment and have made part of the payment, would expect that the builders charge the lower rates of GST on invoices raised and payments made after April 1. Builders will have to grapple with challenges such as dealing with ITC on purchases of inputs made before that date where a large part of the inputs have already been used in the projects. For projects where effective construction is completed by March 31 but occupancy certificate (OC) is obtained after that date, there could be an ITC loss on instalments collected after April 1. A formulae to avail of ITC in case of under-construction projects could figure in the discussions of the GST Council tomorrow. There has been a renewed focus on affordable homes, this time from a GST perspective, clearly in line with the government's plans of housing for all by 2023. The carpet area limits have been increased to CHINESE WHISPERS sible, Modi and the BJP will have to wake up to the need for upholding secularism and prove that Hindutva was just a stepping stone and that they are not averse to building a consensus about upholding the spirit of the Constitution. What Modi does and speaks during the few weeks left before the elections will be crucial in deciding India’s fortunes in the next decade, irrespective of who wins or loses in the election. M G Warrier Mumbai A bridge too far This refers to “Modi and the Liberals” by TCA Srinivasa Raghavan (March 16). Both, the Congress and the country, are paying the price for not cultivating a proactive Opposition in politics and in the Parliamentary system of governance we adopted, postindependence. The piece suggests some action points that can be considered by Narendra Modi (pictured) if he is serious about retaining the Bharatiya Janata Party (BJP)-led National Democratic Alliance in power for another term and beyond. The Congress would have done much better in 2019 if the party had come out of the illusion that British had handed over India to one family. The party seems to believe that the absence of family control in governance is just an aberration, off and on, and India can ill-afford to displease the Nehru hierarchy in the long-term. This belief is preventing the party from accepting new ideas or professionalising leadership at different levels. To prove that an alternative to the Nehru-Gandhi legacy is pos- https://t.me/TheHindu_Zone_official That was the title of the movie and book on Operation Market Garden — the largest paratroopers cum ground force operation in military history carried out in 1944. The Allies needed to capture three bridges but they failed. But in India, particularly in Mumbai, every suburban train commuter needs to “capture” bridges at least four times in his daily sojourn. The first issue is that when an accident takes place, all authorities compete to point out who is not responsible. If the bridge belongs to and is the responsibility of the Indian Railways, then will the municipal authorities also cede the mandatory 25 metres > space in the periphery as in the case of rail lines? How about a board on each bridge that this bridge is under this authority and if there are borders within the bridge, that is, at which point the responsibility of one authority ends and the other takes over, that too should be demarcated on the floor of the bridge. The same can be applied for flyovers, sky walks etc. How about a special “bridge insurance” with only those who hold suburban train passes eligible for a claim in case of a mishap? Again, the unnecessary load contribution by hawkers and other unauthorised stuff that one always finds on these bridges should be cleared at once. To evenly spread the load, there must be a central barrier and pedestrians must keep to the left in both directions. Can the bridges take the load that has increased by more than three times since they were built? These are questions that need to be answered. T R Ramaswami Mumbai Letters can be mailed, faxed or e-mailed to: The Editor, Business Standard Nehru House, 4 Bahadur Shah Zafar Marg New Delhi 110 002 Fax: (011) 23720201 · E-mail: letters@bsmail.in All letters must have a postal address and telephone number HAMBONE https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official OPINION 13 > Volume XXlll Number 153 STAY INFORMED THROUGH THE DAY @ WWW.BUSINESS-STANDARD.COM ILLUSTRATION: AJAY MOHANTY MUMBAI | MONDAY, 18 MARCH 2019 Anaemic exports growth Trade deficit hits a new low, but that’s small consolation A ccording to the trade data released by the Union ministry of commerce on Friday, India’s trade deficit is at the lowest it has been for more than a year. The deficit — the difference between how much India exports and how much it imports — reached $9.6 billion in February 2019, as compared to the $14.7 billion deficit registered in January 2019. Yet, this cannot be seen as a sign that stability has returned to the external account. In fact, the data reveals that India’s structural weaknesses continue, and thus macroeconomic stability cannot be taken for granted. In particular, weak exports growth shows that India will continue to struggle to pay for imports if the demand for those recovers. Exports rose just 2.4 per cent year on year in February 2019, lower than the 3.7 per cent increase registered in January. Crucial sectors such as engineering and gems & jewellery saw low or negative growth. Gems & jewellery exports, for example, contracted by 2 per cent. It is clear that any hope that was raised earlier this financial year of a rebound in exports was illusory. Indeed, the withdrawal of the Generalised System of Preferences trading programme from Indian exports by the United States administration will only make it tougher for certain export sectors to recover. This is particularly true of Indian engineering exports, which will have to deal with tighter competition from zero-tariff countries. There has been some improvement on the ground in terms of permission and ease of doing business over the past few years, but not enough to ensure competitiveness. It is not realistic, therefore, to expect a sharp upturn in the short or medium run for Indian exports in these sectors. The Federation of Indian Exporters has blamed global conditions for this poor performance. But this claim does not stand up to scrutiny. According to Deutsche Bank, for example, the weekly Harpex Shipping Index tells the opposite story — that global trade began to improve in January. Though the shipping index is not necessarily an index of either world trade or the global economy, it is an indicator. The reason that the trade deficit has narrowed is thus not a robust performance from exports but a fall in imports. This is driven partly by a decrease in the oil import bill. As has been seen in the past, such a decrease can hardly be relied upon to keep India’s external account stable — in fact, quite the opposite. Gold imports also fell, puzzling many observers. But non-oil, nongold imports contracted for yet another month — falling 3.7 per cent in February, following on from a 0.8 per cent fall in January. This is a disquieting trend, as it suggests sluggish industrial demand within India. It is also hard to reconcile with the overall data on economic growth. If growth in Indian gross domestic product (GDP) is at an all-time high, it is hard to see why import demand would be falling. It is also difficult to see how exports growth can be so anaemic if the Indian economy is seeing record economic growth. This underlines the continuing concerns about data that are being raised by economists at this time. Brexit in limbo A Ms May has not served UK’s best interests s the UK gets ready for yet another vote on Brexit on March 19, the only certainty that can be predicted is more uncertainty. With a mandate from Parliament to extend the Brexit deadline from March 29, Prime Minister Theresa May is bracing herself to bring her third Brexit deal to vote. This vote is required ahead of the European Union summit of March 21-22, where she will appeal for an extension of Article 50, the withdrawal notification. The outcomes of both events on the Brexit timetable are, however, open questions. It is hard to see why she should win another vote on the same deal when many Conservative MPs defied the party whip to hand her one of the largest defeats in parliamentary history just last week. Indeed, nothing seems to have materially changed. The “Irish backstop”, which keeps the UK in the EU until a new agreement, remains the point of fierce contention. The backstop has created turmoil because it potentially commits the UK to a customs union with the EU without any say in rulemaking — that is, if the UK and the EU do not reach an agreement by December 2020, when the pre-negotiated transition period ends. This defeats the purpose of Brexit in the first place. Ms May insisted that the new deal she negotiated with the EU — after her first deal was defeated in January — offered assurances that the backstop would not be imposed indefinitely, only to be contradicted by the Attorney General. The short point is that Ms May has not served the UK’s best interests, as she claims. The country is in a bind, more so now that MPs have voted strongly against a second referendum. First, she set an extremely challenging deadline for Brexit — just two years. Then she inexplicably called elections, which whittled the Conservative majority so drastically that she is forced to depend on the Irish Democratic Unionist Party (DUP) to stay in power, which has led to the complication of the backstop. Third, she has refused to accommodate cross-party talks with the Opposition, which may have won her more support. Much now hinges on the upcoming EU summit. By one interpretation, the extension can last only till May 23; any delay beyond that would require the UK to participate in the elections for the European Parliament (EP), which begin on that day. By another, the deadline could extend to July 2, when the new EP members take their seats. Ms May appears to be banking on the latter date, assuming it will give her more time to sell her unpopular deal. On the whole, the issue is now so wide open that no one can say with any assurance where Brexit is headed. Meanwhile, the Centre for European Reform has shown that the British economy is 2.5 per cent smaller than it would have been had the Remainers won the Brexit vote. The chancellor of the exchequer has revealed that the country is scheduled to spend a stupendous £4.2 billion on Brexit negotiations. All economic modelling has shown that the UK will be worse off outside the EU. It’s literally Mayday for Europe’s second-largest economy. Self-reliance in defence The design, development and production of defence equipment must be indigenised for strategic independence O ver the past few weeks we have heard a lot about the Rafale deal in the political playground and the media. The focus of the arguments is mainly around the cost of the present deal as compared to the earlier one which was under negotiation and about the role of the Prime Minister’s Office (PMO) in the negotiating process. This particular football will continue to be kicked around during the election campaign and after. This is par for the course for a major international arms acquisition deal. The real problem is being bypassed in this debate. It is our heavy dependence on imported arms supplies. According to the SIPRI (Stockholm International Peace Research Institute) database, the volume of international arms transfers to India was around $3 billion in 2017.1 The other major claimants to global or regional power status2 do not depend on arms imports except from close allies, the arms transfer to all of NITIN DESAI them being just $4 billion in 2017. In fact, many of them are major exporters of sophisticated arms. No country that depends heavily on others for critical weapons systems can hope to have strategic independence. From a long-term perspective, the arguments voiced about the Rafale deal do not really address what should be our core concern — our continuing dependence on other powers not just for sophisticated systems like fighter planes but even for basic things like rifles. Our defence acquisition process has failed to stimulate long-term investments in armaments research, precision engineering, new materials, sophisticated electronics and other such areas that are the foundation for the manufacture of sophisticated weapons. A defence equipment industry has to rest on a BOOK REVIEW PREET BHARARA F or many Americans, the greatest reason to cheer during the sleepy, lowscoring game that was Super Bowl LIII was not the Patriots’ victory. In certain circles, it was the highly anticipated, multimillion-dollar commercial produced by the Washington Post, featuring the voice of Tom Hanks and heroic footage of journalists from various outlets that proclaimed, over a soaring score, these simple truths: “Knowing empowers us, knowing helps us decide, knowing keeps us free.” It was a good ad, inspiring even. Who doesn’t love Tom Hanks? But you could find The Washington Post commercial uplifting and also saddening, insofar as it was deemed necessary. https://t.me/TheHindu_Zone_official 1SIPRI values transfers at a standardised price, which for the Rafale, for instance, is $55 million per aircraft, way below what India will actually pay 2This includes the present and potential aspirants, other than India, for permanent membership of the UN Security Council: The USA, Russia, China, the UK, France, Germany, Italy, Japan, Brazil and South Africa 3For more on this, see Ajai Shukla “Why Defence Indigenisation Fails”, Business Standard, July 30, 2018 nitin-desai@hotmail.com Repo-linked deposit rates: A tiny half-step O n Friday, March 8, State Bank of India (SBI) announced that starting May 1, savings bank account deposits and short-term loans (overdraft and cash credit) above ~1 lakh would be linked to the Reserve Bank of India’s (RBI’s) repo rate from. (Repo is the rate at which the central bank lends money to banks when they face shortage of funds.) Every single commentator I read has hailed the move as a logical next step, after the RBI asked the banks in December last year to link all new floating rate retail loans like home loans with an external benchmark from April 1, 2019. Any careful observer will immediately notice that what the central bank wanted and what SBI has done are far apart. SBI has linked deposit rates to repo rates (thereby making them floating, from fixed). But it has not announced the linking of lending rates of longer-term loans for businesses and retail customers of home loans, personal loans, auto loans, etc. to make these true floating rates. For DEBASHIS BASU borrowers affected by the opaque and discriminatory practices of banks, the loot will continue. Remember that under Urjit Patel as governor, the RBI had announced that banks would have to link lending rates to an external benchmark, but, under the new governor, it is showing no hurry to take this forward. In fact, it almost seems certain that April 1 will come and go and banks will be let off again. That would be in line with RBI’s repeated failure to ensure a proper transmission of interest rates where a reduction in the interest rate by the central bank would ensure lower rates across the system and vice versa. Will SBI’s move help the RBI’s objective of improving transmission? Consider this: 1. Banks have been claiming that since the bulk of the deposits is fixed, they do not have the flexibility for transmission. How much of bank deposits are in savings accounts? For SBI, savings account deposits make up 38 per cent of the total. Of this 20 per cent are below ~1 lakh. This means that only 80 per cent of 38 per cent, that is 30 per cent of deposits, will be floating. So, 70 per cent of deposits will remain fixed, which would continue to hamper the ability of banks to implement a true floating rate regime. 2. What would be the impact on the bank’s marginal cost of lending rate (MCLR)? A 25 bps reduction in the interest rate on these deposits could lead to a reduction of only 7 bps in the bank’s MCLR with this move. It is better than before but only a very tiny step. 3. In any case, SBI taking a tiny halfstep forward won’t mean much for the system as a whole, unless the rest of the banks follow SBI. According to media reports, most other banks are not likely to do so. 4. According to one interpretation, after the savings account is repolinked, part of such deposits will get converted into fixed deposits. If so, even less of the deposits would be repo-linked, reducing the transmission even further. IRRATIONAL CHOICE Journalism’s advocate It was an astonishing thing to witness — an iconic news organisation feeling the need to hawk not the quality of its writing and reporting, but the most fundamental virtues of its entire industry’s mission. Like truth. And knowledge. Values thought to be long settled. Merely having your business model enshrined in the First Amendment to the Constitution is no longer sufficient; now you need airtime during the Big Game to respond to crude and corrosive attacks on the free press by a president and his supporters with their incessant charges of “fake news!” Fake news. It is a juvenile epithet, but it has power because it is both thoughtless and memorable. It is also a debate stopper. When uttered with a contemptuous smirk, it’s the equivalent of “shut up!” No intelligent response can suffice, no evidencebased retort can win. “Fake news” has the charm of comedy, the ease of a sound bite and now the imprimatur of the president of the United States of America. In his fine new book, Truth in Our Times: Inside the Fight for Press Freedom in the Age of Alternative Facts, the New diverse and substantial manufacturing capacity and research competence in the economy as a whole if it is to keep up with its competitors. That is why Pandit Nehru’s note on defence policy written more than 70 years ago in 1946 states: “No country which is not industrialized can carry on war for long, however good the army might be. No country which has not got its scientific research in all its forms and of the highest standing, can compete in industry or in war with another.” This strategic perception, rather than the Mahalanobis model, lay behind the drive to promote the rapid development of basic industries and the strong commitment and support given for the establishment of defence-related R&D capacities like the Defence Research and Development Organisation (DRDO) and the Atomic Energy Commission. How well have we done on these twin objectives of building manufacturing capacity and research competence? At the macro level, the share of manufacturing in GDP did rise in the first phase of planning from around 11 per cent to nearly 16 per cent by the mid-seventies. But since then this proportion has hovered around the 17 per cent mark. This aggregate number of course does not capture the definite change in the degree of sophistication in the manufacturing sector. Moreover, we must recognise that developments outside the manufacturing sector, for instance, in information technology, also have substantial strategic value. Yet if one compares India to China, one cannot escape the conclusion that in most sophisticated products we are still dependent on imports for production technologies, specialised materials and precision-engineered components. With regard to science and technology (S&T), the picture is not much better. India accounts for about 4 per cent of global R&D spending, according to the authoritative Batelle assessment. For comparison, China accounts for 21 per cent, more or less equal to the share of Europe and only a little short of the share of the USA. Our R&D spending as a proportion of GDP is just 0.7 per cent, according to official statistics. Clearly we have a long way to go in meeting the challenge of creating world-class manufacturing and S&T capacity. A determined effort to develop a sophisticated defence equipment industry by providing longterm assurance of demand can play a crucial role not just for strategic independence but also for upgrading the civilian part of the economy because of the potential spin-offs. Much of the United States’ strength in civilian technology areas rests on heavy investments in defence research and production, both by the government and the private sector. The internet and information technology are prime examples of this spin-off. As far back as 2004-05, the Kelkar Committee report on strengthening self-reliance in defence preparedness laid out a glide path for moving from import dependence to building genuinely Indian weaponry. A key part of this was the identification of champion companies which could undertake long-term research, development and production in the private and public sectors.3 Unfortunately, this has not happened. On the one hand, public sector units like Hindustan Aeronautics Ltd (HAL), which have built substantial technical competence, are being bypassed for perceived shortcomings in performance, particularly with regard to timely delivery. On the other hand, the effort to build competence in the private sector has not gone much beyond contract manufacturing. Long-term commitments of assured demand to promote research and competence building in private sector companies are still unknown, perhaps because of a fear about crony capitalism accusations. The DRDO has been funded and accounts for about one-third of public spending on S&T. It has some significant achievements to its credit, but there is still a big trust deficit between the user services and the DRDO. Yet another factor is the pressure to quickly match the capabilities of potential foes by importing rather than waiting for an indigenous option. As for “private incentives” from suppliers, the less said the better. These fault lines need to be erased. We must now aim at bringing together the user services, the researchers and the chosen producing companies together in national missions for specific defence systems. We must short-circuit the political jousting by creating a multi-party security council that will be asked to endorse these national missions. We must be ready to live with some short-term risks for stronger and more reliable long-term security. Only then will we have the strategic independence that we need to protect our national interests. York Times deputy general counsel David E McCraw thoughtfully (and entertainingly) addresses this state of affairs as he takes us behind the scenes of the venerable (or failing, depending on your perspective) New York Times. A self-professed “raving moderate,” McCraw is in prime position to provide this backstage view as he draws equally on his experience as a writer and a lawyer. He excels at both, explaining legal issues in lay terms and unspooling the stories that propel the book. But McCraw’s job was far more interesting than assisting in occasional ad-making. He faced the challenge of vetting articles for libel, obtaining blockbuster documents through the Freedom of Information Act, greenlighting the publishing of purloined secret information and standing up to intimidation from unhappy subjects of stories, one of whom is the current president. There is plenty about Donald Trump here, whose danger to the free press McCraw concedes he was slow to acknowledge. His professional experience with Trump went back many years, and he adroitly tells the story of how Trump, in 2004, threatened Deposits: The false bogey There are two critical factors being missed in this debate. One, while banks are making a song and dance about the fact that their liability side is not floating, the real issue is the spread. In the debate on transmission, there is surprisingly no discussion on what other factors go into deciding the spread, and thereby the lending rates of banks. For the MCLR, the RBI to sue over the one slight he truly could not bear — that he was less wealthy or successful than he claimed. The Times had reported that his boast on “The Apprentice” that he was the “largest real estate developer in New York” was plainly false, by every objective measure. This was an intolerable slight, and it drew the future president’s wrath. But Trump’s outlandish claim was indefensible, and the matter was dropped. Then there was the occasion when a portion of Trump’s 1995 tax returns showed up one day in a reporter’s mailbox during the heat of the 2016 campaign. McCraw describes the warring that ensued. Belligerent Trump lawyers threatened legal action, as usual. In the end, as in every other instance of high-decibel Trumpian legal threats, the dog barked but never bit. McCraw also takes time to meditate on journalistic practices and ethics. He is candid and cleareyed about the lean of his paper’s readers and its opinion writers. He says that by the “time of Trump’s election there was no doubt about the politics of our core readership: It skewed left, and, in any measure of its opposition to Trump, it went off the charts.” He concedes, moreover, that The Times’s “Op-Ed columns and contributors are overwhelmingly antiTrump, every day.” But he is insistent about https://t.me/TheHindu_Zone_official methodology includes three more factors other than the cost of deposits/funds: Negative cost of carry on the cash credit ratio and statutory liquidity ratio; unallocable overheads which left enough scope for banks to show a higher figure by not being clearly defined; and average return on net worth, which is another figure that banks can fudge. Even experts blame the inflexible cost of deposits (funds) as the only hindrance to transmission. There is no scrutiny of the other three factors that determine the MCLR. The RBI has also played along with this farce. Two, the biggest impediment to public sector banks (PSBs) not being able make their lending rates truly float is irresponsible, indiscriminate and corrupt lending that has created a mountain of bad loans. This has made them bankrupt, requiring public money to be pumped in to revive them, over and over again. Unaccountable bankers have hampered the PSBs’ ability to lend and this has kept lending rates high, while they blame a distant factor such as inflexible deposit rates for lack of transmission. The transmission of interest rates has failed miserably for 20 years, partly because of poorly designed policies and partly due to the benign negligence of the RBI. Banks are focused on their bottom line and not on transmission. Transmission reduces their profits and, hence, is not a concern to them. SBI could have made its deposit rates floating anytime since 2011 when the RBI policy allowed it to do so. But it didn’t. It has acted now, under pressure, as a nod in the direction mandated by the RBI. If transmission has to succeed, we need a clear set of guidelines that do not allow banks to fudge internal calculations to cheat borrowers, and continue with the status quo. The writer is the editor of www.moneylife.in Twitter: @Moneylifers the overall political objectivity of the news people, the beat reporters. He argues that the everyday news folk, at The Times and elsewhere, are not generally partisan. He doesn’t claim that they are perfectly detached, disinterested, nonideological chroniclers. He acknowledges a certain lean on their part too. “Many journalists are biased,” he concedes, but “just not in the way that most people think about it.” By McCraw’s reckoning, reporters tend to champion the underdog, and it is this worldview that skews their coverage. “The easy rap,” he writes, “is that most reporters lean liberal (true), and that dictates how they cover a conservative like Trump (false). … They believe, all other things being equal, that the little guy is getting screwed. … The reportorial default is to think that most regulations are good, the rich and connected don’t need more money or more power.” He insists, therefore, that any bias “is not a left or right thing.” McCraw is rightly proud of his role in defending The Times in so many controversies. But there is also a whiff of helplessness in his telling about the degradation of truth and of people’s trust in the press, neither of which is really a matter of law or legal policy. The law, it turns out, is in good shape. Legal freedom, as an attorney might say, is necessary but not sufficient. Just as important, McCraw explains, is public trust: “It doesn’t really matter how much freedom the press has in a society if the press is not believed. A distrusted press is little different from a shackled press.” This is the crisis, well identified. One need not literally shutter press outlets in the manner of Recep Tayyip Erdogan or Xi Jinping or Vladimir Putin to render the press irrelevant and impotent. But occasional and understandable bouts of pessimism aside, Truth in Our Times is not dire. It is spirited and hopeful and even, at times, lighthearted. It is, in a way, a love letter to the First Amendment. McCraw captures the mood best in one early sentence: “It was a hell of a time to be a lawyer for The New York Times.” It sure was. ©2019 The New York TimesNews Service TRUTH IN OUR TIMES Inside the Fight for Press Freedom in the Age of Alternative Facts David E McCraw All Points Books; $28.99; 304 pages https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official 14 PERSONAL FINANCE VALUE OF ~100,000 MUMBAI | MONDAY, 18 MARCH 2019 GOLD SENSEX INVESTED IN VARIOUS ASSET CLASSES #Silver prices suffered losses; *Note: Cumulative equity gains up to ~100,000 in a financial year are tax-free. All post-tax returns are calculated for an individual in the 30 per cent tax bracket, without considering the indexation benefit 1-YEAR 1-YEAR POST-TAX RETURNS 5-YEAR 5-YEAR POST-TAX RETURNS SILVER FD (SBI) PPF 1,12,880 1,05,375 99,100 1,06,250 1,07,600 1,12,880* 1,03,763 NA# 1,04,375 1,07,600 1,74,345 1,03,801 78,971 1,50,366 1,51,757 1,74,345* 1,03,421 NA# 1,33,507 1,51,757 As on March 15, 2019, in ~; compiled by BS Research Bureau > . Invest in Reits for regular income While experts expect this new asset class to give annual returns of 12-14%, investors should temper their expectations in view of cyclicality in commercial real estate T he initial public offer (IPO) of Embassy Office Parks real estate investment trust (Reit), backed by private equity giant Blackstone Group and Bengaluru-based developer Embassy Property Developments, opens for subscription today. This is the country’s first Reit issue, with plans to raise ~4,750 crore. Before you make up your mind to invest in this offer, carefully weigh the pros and cons of this entirely new asset class. Ensuring investor safety: The Securities and Exchange Board of India (Sebi) has taken a number of steps to make this new asset class safe. “Since this is a listed instrument, Sebi requires a long list of dis- closures by the sponsors in the offer document, to ensure a high level of transparency,” says Vamshi KK Nakirekanti, executive director and head–valuation services, India, CBRE South Asia. Also, 80 per cent of the commercial real estate portfolio held by a Reit will have to consist of developed, income-generating properties. “Promoters will not be permitted to launch a Reit with just a land bank,” says Somy Thomas, managing director–valuation and advisory and co-head–capital markets, Cushman & Wakefield India. This provision will minimise development risk. Furthermore, 90 per cent of the net income after expenses will have to be paid out as dividend. Payouts have to be made at least twice yearly. “This will reduce the Out of three players, two aren’t investment worthy and the third is part of an opaque conglomerate DEVANGSHU DATTA Even after brutal consolidation, two of the three survivors in the telecom services industry look to be in trouble. Vodafone-Idea and Airtel are reeling from massive losses and raising huge sums to shore up balance-sheets. The sector contributes 6.5 per cent of the Gross Domestic Product (GDP) and employs 4 million, directly and indirectly, even after huge job losses. It has absorbed about ~10 trillion of investments, including close to ~4 trillion on spectrum payments. The industry has over ~4.5 trillion in debt, and about ~2.5 trillion in annual revenues. That debt: revenue ratio is unsettling. The 2019 Interim Budget estimates that revenues accruing to government from telecom for 201920 will rise to ~41,520 crore, which is 5.8 per cent more than the revised estimate of ~39,200 crore for the current fiscal, 2018-19. The initial Budget estimate for 2018-19 was ~48,661 crore, revised downwards to ~39,200 crore. Actual revenues to the central government were ~30,700 crore in FY2017-18, against a Budget estimate of ~44,300 crore. Quite apart from the initial overestimates, which are significant, the falling trend illustrates stress. The central government’s revenue stream includes spectrum usage fees, revenue share, goods and services tax (GST) collections, etc. But the big windfalls come from spectrum auctions. There were no auctions in 201819 since the industry wouldn’t have been capable of bidding. Telecom was already struggling in September 2016, when Reliance Jio (RJIL) launched services. Jio was allowed to offer free services for six months. That provoked a crisis and triggered massive subscriber churn. Already low average revenue per user or ARPU and profitability nosedived for every player. Just three private entities are now operational. (The PSUs, BSNL and MTNL, are bankrupt and surviving on bailouts). Two of them, Vodafone-Idea and Airtel have suffered losses since the second half of 2016-17. The third, RJIL, has gained revenue share and claims to be prof- Capital value (~/ sq ft) Rental yield (%) 35,000-40,000 20,000-25,000 8,000-12,000 5,500-7,500 8,000 -9,000 8,500-9,500 8,000-8,500 7,200-7,700 10,000-11,000 10,500-11,500 14,000-18,000 7,500-8,500 8.25-8.50 8.25-8.75 8.25-9.25 8.25-9.50 8.50-9.00 8.25-9.00 8.50-8.75 8.50-8.75 8.20-8.50 8.00-8.30 8.25-8.75 8.75-9.25 Yields are for Grade A properties, Source: Cushman and Wakefield Research India Telecom: A tough bet MARKET INSIGHT Micromarket BKC MUMBAI Lower Parel ORR BENGALURU Whitefield Guindy CHENNAI Pre-toll OMR Madhapur HYDERABAD Gachibowli Kharadi PUNE Hadapsar Prime NH-8 NCR Noida Expressway SANJAY KUMAR SINGH & TINESH BHASIN Reits make commercial real estate accessible: If a retail investor wishes to take exposure to commercial real estate directly, he would find it very difficult. The investment required is very high — ~5 crore and above for grade A commercial property. Investors could face titlerelated issues for which they may not be able to do the due diligence themselves. Exiting such large investments can be time taking. “Many of these challenges get taken care of when an investor takes the Reit route. Investors can enter Reits with just ~2 lakh of initial investment and be able to diversify their portfolios,” says Prateek Pant, head-products and solutions, Sanctum Wealth Management. Exiting these investments should also be less difficult as units will be listed on the stock exchanges. Investors will also get the benefit of professional management of office properties. RENTAL YIELDS RANGE FROM 8% TO 9.5% City itable, though it is still burning cash, as it rolls out ambitious plans. Unlike Airtel and VodafoneIdea, which are pure telecom plays, RJIL has the backing of a highly profitable, giant parent, with multiple interests. Hence, although RJIL has spent well over ~2 trillion so, it can continue to play an aggressive game. The RJIL drive into retail plus fibre broadband rollout will open up new revenue streams. Bharti Airtel had 72 per cent drop in consolidated profits for October-Deccember 2018.The net profit of ~86.20 crore was thanks to a one-time gain of ~1,413 crore and a deferred tax asset of ~7,002 crore. Or else, Airtel would have had huge losses. The total revenue was ~2,005 crore, just 1 per cent higher than ~2,003 crore in Q3, 2017-18. Vodafone Idea registered ~5,057 crore in net losses, the second quarter of post-merger operations. This was despite a tax write-back of ~2,000 crore. Merger synergies helped it to reduce Operating Expenses (ex-license fees and spectrum usage charges) by ~705 crore to ~815 crore. Meanwhile RJIO declared ~830 crore in net profits on total revenues of ~10,383 crore. The Q3, 2018-19, RJIL ARPU of ~130 (Dec 2018) is also better than Airtel (~106) and Vodafone-Idea (~89). Vodafone-Idea and Airtel did raise ARPU by shedding low-value “incoming only” customers. Airtel dropped 48 million subscribers in Q3, while Vodafone-Idea dropped 36 million subscribers. RJIL gained 28 million subscribers. The highly-leveraged Airtel and Vodafone-Idea are looking to raise more cash. Both need to cut debt and fund operations. Airtel will sell a larger stake in its tower arm, Bharti Infratel to raise upto $3 billion and it’s looking to raise about ~32,000 crore via a rights issue cum preferential debt as well. VodafoneIdea is looking at a rights issue of ~25,000 crore. India Ratings expects RJIO to increase revenue market share from the current 26 per cent to 38 per cent by end of 2019-20 while Vodafoneidea RMS will decline to 29 per cent and Airtel’s RMS will drop to 28 per cent. This is not a healthy situation. A highly concentrated industry eventually ends up being monopolistic with poor service standards, and low incentive for incumbents to improve technology. At some stage, all three will raise tariffs, for sure. Investors are looking at a toxic situation where two out of three players are not investment-worthy and the third is part of an opaque conglomerate. https://t.me/TheHindu_Zone_official risk of sponsors misusing rental income from properties,” says Thomas. Sebi has ensured that sponsors of Reits continue to have skin in the game. “Sponsors will have to maintain at least 25 per cent stake in the Reit even after its listing. They can not list and exit,” says Nakirekanti. One risk in a Reit arises from its novelty. It remains to be seen whether it will function in India as it has in developed markets like the UK, Singapore, Canada and Australia, where it serves as a stable, income-generating asset. Returns you can expect: Rental yield from commercial properties is in the range of 8-9.5 per cent. In addition, there is capital appreciation. These two components will together determine the return from this product (less costs). Capital appreciation will depend on a few factors. First, the lease agreements with existing tenants have an escalation clause. Second, when leases expire and are renewed, the old rental rates rise to existing market rates. And third, the 20 per cent or so under-construction portion will become ready and get leased. As a Reit’s rental income appreciates, it will get reflected in the capital value of its assets, and hence in the price of units. Real estate experts expect REITs to give an annualised return of 12-14 per cent. Financial advisors are not so sure if such high returns will be forthcoming. A variety of factors can prevent rentals from rising rapidly. Economic downturns affect the demand for commercial real estate, LOANS FOR USED CARS ARE EXPENSIVE Bank Processing fees Part pre-payment charges Foreclosure charges 10.75-12.05 13.75 -16.00 Up to ~1,500 ~2,500~5,000 NIL 13-24 months-5% Post 24 months-3% 12.25 ~500-~7,000 NIL NIL 7-12 months-6% 13-24 months-5% After 24 months-3% NIL 1% (Max ~6,000) Union Bank of India 10.60-12.10 Up to 0.50% (Max ~15,000)* Canara Bank 8.95-9.60 ~1,000-~5,000 Bank of India 9.25-9.85# NIL till 31.03.2019 Up to 180 days -10% After 180 days-5% NIL Up to 180 days-10% After 180 days-5% NIL NIL NIL NIL NIL 15.00-17.00 *50% concession in processing charges based on CIBIL score and valid till 31.03.2019, #Valid till 31.03.2019 under festive offer. Note: Processing fee is a percentage of the loan amount, part prepayment charges are percentage of amount paid, foreclosure charges are a percentage of the principal outstanding, HDFC Bank doesn’t allow part pre-payment for the first 12 months and foreclosure for up to six months. The lenders above have a maximum tenure of five years, except State Bank of India (7 years) and Bank of India (3 years) Source: Paisabazaar.com with the bank, he can check personal loan offers | If the difference between a personal loan and a used car loan is 1-1.5 percentage point, the former is preferable. For a used car, a lender will give a loan of up to 80 per cent of Track provident fund default by your employer Enrol for universal account number and use the Umang app to keep a tab TINESH BHASIN by-case basis. The number of notices to employers for defaulting on provident fund (PF) payments is on the rise. The Employees' Provident Fund Organisation (EPFO) has started using technology extensively to track provident fund payments, according to human resource (HR) consultants. The retirement body is using data mining and data analytics to zero down on defaulters. “Every month the EPFO system does an area-wise analysis of employers’ contributions. If there are discrepancies or the contribution is low, EPFO looks at the reasons and sends notices,” says Prakash Rao, founding member and chief experience officer, PeopleStrong. Defaults happen due to a variety of reasons. The company could be making losses. They can also happen due to employer’s negligence or outright fraud on his part. Earlier, it was difficult for an employee to find out whether the employer has been depositing his share of PF contribution. With the introduction of Universal Account Number (UAN), it’s now easy for a salaried person to keep a tab on his employee provident fund (EPF) account. Employees can now complain immediately. The retirement body, however, may deal with each default on a case- Enrol for universal account number: For an individual joining the workforce and earning a basic salary of over ~15,000, enrolling for PF is optional. The employer may also choose not to give the EPF benefit. But once enrolled, the company or the salaried employee cannot opt out. Earlier, employees had to rely on the annual statement slip that their employer provided or apply to the regional provident fund commissioner (RPFC) to know the details. Now, with UAN, an employee can easily find out whether his employer has deposited the PF or not by visiting the UAN website or through Umang app. If your employer doesn’t deposit the PF, you can approach the labour department and file a complaint. According to HR consultants, the labour department has of late started putting pressure on employers to comply and it even mediates. Even if your employer runs a private PF trust, you can still get the information through UAN. Wilful default by employer: According to regulations, every employer is supposed to deposit the PF money with the EPFO by the 15th of the next month. Even if it misses one payment by the https://t.me/TheHindu_Zone_official Taxation of Reit: When a resident Indian sells Reit units at a profit, he will have to pay capital gains tax. “If the holding period is over three years, the investor will pay 10 per cent of the gains as tax, subject to payment of securities transaction tax (STT). If the units are held for less than three years, the gains will be taxable at 15 per cent, subject to payment of STT,” says Gaurav Karnik, partner and national leader (real estate practice), EY India. The dividend paid by a Reit is taxfree in the hands of investors. A trust can also earn interest from SPVs, which could be passed on to investors. “The interest income earned by a domestic investor is subject to withholding tax at 10 per cent by the Reit and taxed at marginal rates,” says Karnik. For a nonresident, the interest income is taxed at 5 per cent, and capital gains tax rate depends on the treaty India has signed with the investor’s country of residence. Interest rates (%) Oriental Bank of Commerce Axis Bank with the value of the car based on its age, model and kilometres clocked, and how the four-wheeler was used | Also, when a lender gives a loan for a pre-owned car, it funds a vehicle that is in the name of the previous owner | If the borrower has a good credit score and a relationship Do the due diligence: Check the track record of the sponsor, specifically, how much commercial real estate he has developed and its quality. Next, the quality of buildings needs to be checked. Since it will be difficult for retail investors to do so, they should use the quality of tenants in those buildings as a proxy (information on tenants is available in the prospectus). “If a Reit has mostly MNC and blue-chip companies as tenants, investors can rest assured that the quality of buildings will be good, since these companies have their own standards and do not rent buildings that do not meet their specifications,” Who should invest? Those in need of a regular income may invest in these new instruments. Both risk and return from this asset class is expected to be higher than from fixed-income instruments. Well-to-do retirees with some risk appetite may invest in them. “For retirees Reits should be one of the several instruments they use to generate income,” says Dhawan. Income from Reits should initially be 5 per cent of their total income. This figure can rise to 25 per cent if the asset class lives up to expectations. Keep your overall exposure to real estate in mind. Whatever your exposure to growth assets, roughly a third of it should be in real estate, and your REIT exposure should be a part of that allocation. PUBLIC SECTOR BANKS HAVE LOWER RATES, CHARGES State Bank of India HDFC Bank | Used car loans are much more expensive than new car loans. The difference in interest rates can be 3-7 percentage points | While a new car only involves taking credit risk on the borrower, lending for a used car is more complicated | A financier has to come up causing rental rates to stagnate and vacancy levels to rise. Influx of new supply in a geography can also affect the rate at which rentals rise. “Treat Reit primarily as an income-generating asset that will give you returns close to the rental yield, with some upside coming from capital appreciation. By expecting a very high rate of capital appreciation, you could set yourself up for disappointment,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisor. says Thomas. Reits will be listed on the exchanges. However, the price at which the units trade — at a premium or discount to NAV — remains to be seen. This will depend on factors like level of investor interest, rate at which dividend income appreciates, and so on. deadline, it is a default. Sometimes a business starts making a loss. Companies start delaying salaries and also default on depositing EPF money. HR consultants say that EPFO may give a few months’ leeway to companies in financial troubles to comply. But before giving any further time to comply, the retirement body studies the company’s financial situation. It goes through the books of accounts and bank balances to ascertain that the financial troubles are genuine. If the company still doesn’t comply, EPFO can initiate proceedings. There have also been many cases where employers hold back the money deliberately. The penal interest that the EPFO levies is low. Some employers invest the money in bank fixed deposits or mutual funds to earn higher returns. After a few the car value. A personal loan can fund the entire purchase as there’s no restriction on its end use GET YOUR UAN Usually, employers provide the UAN EPFO has allotted to employees You can also obtain the UAN through EPFO portal Go to http://bit.ly/bspfuan Click on the tab ‘Know your UAN Status’. A new page appears Fill in the details. You can get the PF number/member ID from your salary slip Click on ‘Get Authorisation Pin’. You will receive a PIN on your mobile number Enter the PIN and click on ‘Validate OTP and get UAN’ button Your UAN will be sent to your mobile number months, they remit the money as arrears and pay the penal interest. To discourage such practices, EPFO now levies “damages” along with other penalties. “It can be as high as 25 per cent of the default amount,” says Divya Baweja, partner, Deloitte India. If a company diverts the money to defraud employees, EPFO comes down heavily on such employers. “In such cases, the retirement body has in the past got court orders to attach the properties of promoters, and employers have even been sent to judicial custody,” says Abhishek A Rastogi, partner, Khaitan & Co. He points out that there have also been cases where an employee and an employer got into a dispute. The latter stopped contributing to PF and/or diverted the money after the relationship went sour. Such employers have faced judicial custody when the employee approached the EPFO and courts. Even unicorns have defaulted: Many start-ups default during their growth phase. From being small outfits, when they suddenly experience high growth, compliances take a back seat. “Almost all the Indian unicorns have featured in the EPFO’s defaulters list at some point of time,” says Rao. When start-ups are small, they don’t hire proper HR consultants. They start complying only when they hit a critical mass. According to law, any company that has over 20 employees needs to start contributing to EPF. Tax experts and lawyers say that an entrepreneur should not delay EPF compliance as, in extreme cases, this can lead to shutting down of the business. https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official THE SMART INVESTOR 15 MUMBAI | MONDAY, 18 MARCH 2019 BSE 200: TOP 5 GAINERS OF LAST WEEK BSE price in ~ QUICK TAKE: MULTIPLE GROWTH TRIGGERS FOR NATCO Mar 8, ’19 Mar 15, ‘19 % chg 162.5 57.0 206.5 768.5 175.6 187.6 65.4 236.6 872.5 197.6 15.5 14.7 14.6 13.5 12.5 Edelweiss Financial Services NBCC India Adani Transmission Jubilant Life Sciences DLF Natco Pharma was up 1.5% on Friday due to brokerage upgrades. Scaling up of emerging market business, upsides from multiple sclerosis drug Copaxone in the US should drive strong earnings growth over the next couple of years. India and rest of the world revenues too are pegged to grow at 20 per cent annually THE MARKETS ARE PRICED FOR AMPLE LIQUIDITY CONDITIONS. WHILE LIQUIDITY GETS SCARCER, BULLISH POSITIONING AND TIGHTENING LIQUIDITY SUGGEST THAT NEGATIVE SHOCKS MAY BE AMPLIFIED HANS REDEKER, Global head of foreign-exchange strategy, Morgan Stanley < Large fund infusions in PSBs fail to deliver The Nifty PSU Bank index is flat since the government announced a ~2.11-trillion recapitalisation plan in October 2017; experts say stick to top stocks such as SBI and BoB SHREEPAD S AUTE & VISHAL CHHABRIA Mumbai, 17 March D espite the government infusing a whopping ~1.9 trillion towards the recapitalisation of public-sector banks (PSBs) between October 2017 and February 2019, a 4x increase over the amount infused during FY15 to FY17, the move has failed to enthuse investors. The Nifty PSU Bank index is almost at the same level as on the day of the announcement of recapitalisation. In fact, barring State Bank of India (SBI), stocks of all PSBs, which benefitted from recapitalisation, are down by 16-57 per cent during this period. Even in absolute terms, the combined market capitalisation of the 20 PSBs is up just 24 per cent from October 24, 2017, to ~5.09 trillion as of March 15, 2019. Without SBI, the combined gain for others is just ~50,668 crore against a fund RECAPITALISATION REPORT ~ crore Recapitalisation Oct '17 till date State Bank of India IDBI Bank Punjab National Bank Bank of Baroda Bank of India Canara Bank Oriental Bank of Commerce Allahabad Bank Central Bank of India UCO Bank TOTAL (For 20 banks) 8,800 12,471 19,628 5,375 23,956 4,865 10,257 13,240 11,746 12,913 1,90,954 Market cap Provisioning 24-Oct-17 15-Mar-19 Apr '17-Dec '18 2,19,687 2,65,685 14,349 33,189 29,387 32,697 32,984 31,204 16,637 25,066 18,946 19,950 4,114 12,306 5,481 11,470 15,141 11,424 5,638 10,033 4,12,167 5,08,833 Net profit/(loss) FY18 9MFY19 1,08,719 -6,547 34,285 -8,238 67,547 -12,283 21,725 -2,432 29,464 -6,044 22,485 -4,222 15,635 -5,872 16,808 -4,674 16,963 -5,105 13,037 -4,436 4,57,430 -86,630 24 -10,198 -5,226 1,425 -5,799 899 -147 -4,500 -3,164 -2,769 -43,447 All figures rounded off; list sorted by market capitalisation,9MFY19: Apr-Dec 2018, Note: IDBI Bank has been taken over by LIC effective January 2019; Sources: Banks, Capitaline, ICRA, compiled by BS Research team infusion of ~1.9 trillion. Indian Bank is the only PSB which did not receive a penny. It was October 24, 2017, when the bad loan-ridden PSBs saw their rebirth with the government announcing an ~2.11 trillion recapitalisation programme. The Nifty PSU index had gained 27 per cent in a day. But the hopes did not last, thanks to multiple factors weighing on asset quality of PSBs, leading to higher provisioning and losses. Data shows that the total bad loan provisioning made by PSBs during April 2017-December 2018 was ~4.57 trillion, or about four times the ~1.2 trillion infused during from October 2017 to November 2018. From December 2018 to February 2019, another ~71,364 crore was infused. With the announcement of ~2.1 trillion recapitalisation, investors were expecting this would not only take care of the provisioning with then existing non-performing assets (NPAs or bad loans) but also help balance sheet growth, says Anil Gupta, vice president and head-financial sector ratings at Icra. However, some big events such as the RBI’s new stringent NPA regulations shattered all hopes. On February 12, 2018, the RBI scrapped all existing loan revamp schemes such as corporate debt restructuring. And, said if there is even one-day delay in fulling debt obligations by a borrower with ~2,000 crore or more exposure, it should be considered as a stressed asset and lenders should initiate resolution process. If nothing turns out in 180 days, then the account should be referred under the Insolvency and Bankruptcy Code (IBC). Though the move is a long-term positive, it raised concerns about PSBs' near-term earnings as they account for around three-fourths of the total corporate lending and the IBC demands 50 per cent upfront provisioning. The other jolt came just two days after the RBI's new NPA rules, when Punjab National Bank reported fraud of ~11,000 crore by Nirav Modi, raising concerns around governance at PSBs. The Nifty PSU Bank index lost 11 per cent in just five trading sessions with these two developments. More importantly, there are structural issues. Ajay Bodke, CEO & Chief Portfolio Manager (PMS), Prabhudas Lilladher, explains:The issues that hobble the performance of PSBs includes short tenure of CMDs (chairman and managing director), constraints in lateral hiring and lack of proactiveness of employees to source new business. But, barring the top 2-3 PSBs, do they have the requisite credit appraisal skills, is still a question. Because, PSBs are inferior on metrics like net interest margins, growth, asset quality and operating expenses, the market has rightly punished them, adds Bodke. PSBs’ financial performance has been worse than expected. Gross NPAs expanded by a huge 350 basis point to 12.9 per cent in FY18 with slippages (accounts turning bad) at 9.3 per cent in FY18, highest at least from FY13. Thus, credit cost or provisioning as a percentage of loan book, too, soared to 4.2 per cent in FY18. The combined net loss of 20 PSBs stood at a whopping ~86,630 crore in FY18, against a combined loss of ~932 crore a year ago. The impact also percolated in subsequent quarters in FY19. Post PNB fraud, the discontinuation of letters of undertaking (LoUs) by the RBI also impacted overseas loan book, which grew only 4 per cent as against 15 per cent domestic loan book growth in December 2018, Gupta highlights. Moreover, recapitalisation also led to a significant equity dilution as it was done when PSBs’ valuation was below their book value, thereby keeping share prices under pressure, says Rohan Mandora, analyst at Equirus Securities. Though PSBs’ asset quality is now improving and some banks have recently moved out of the RBI’s Prompt Corrective Action (PCA) framework, experts say everything is not hunky-dory. Barring SBI, we are not positive on PSBs. Concerns over exposure to MSMEs, the impact of farm loan waiver and loss of market share remain, says Dhananjay Sinha, Head-Institutional Research at Emkay Global. Bodke believes PSBs can, at best, be tactical buys and cannot form part of the core portfolio as they haven't generated wealth for investors over the long term. I would rather focus on top PSBs like SBI and Bank of Baroda, he says. Unless PSBs focus on consistency and predictability of performance and their top brass is assessed on wealth creation, investors are unlikely to find themselves on the winning side. There is still a dearth of growth capital at PSBs, opine experts. ‘Market valuations at current level are not cheap’ PHOTO: KAMLESH PEDNEKAR The markets have gained ground last week despite the election-related uncertainty. KRISHNA KUMAR KARWA, managing director, Emkay Global Financial Services, tells Puneet Wadhwa that a pick-up in the earnings momentum will ensure that anyone investing in the markets from a two-three year perspective will not be disappointed. Edited excerpts: 2009. For the markets, the continuity of policy framework is the most important vector. More than anything else, the markets shun discontinuity in policy direction. KRISHNA KUMAR KARWA Managing director, Emkay Global Financial Services The Indian benchmarks have underperformed their global peers thus far in the calendar year 2019 (CY19). Can the tide turn in the remaining months? Tide can definitely turn, if the country witnesses arrival of a stable government at the Centre, a continuity in the socio-economic policies, and resultantly, a continuation in the economic momentum. On the other hand, things may not improve if geopolitics around the country deteriorates dramatically, and the same results in a black-swan kind of situation. How are the markets viewing political developments? Do you expect the current dispensation to return to power? We are no political pundits, and I have no incremental insights into the same than anyone else on the Street. But yes, if the ruling dispensation comes back, the markets will take it positively, the same way as the markets rejoiced the return of the United Progressive Alliance (UPA) regime in Is the optimism in the mid- and small-caps here to stay? Mid-caps on current valuations offer a healthy mix of valuation comfort and growth compounding for many years to come. This segment, many a time, offers non-linear growth trajectories, which are rare in the large-cap space. At some level, an investor in mid-caps is playing the game of entrepreneurship, which is high risk and high reward. In the long run, a basket of mid-cap stocks offers the best opportunity to generate significantly superior returns over the nominal growth of GDP (gross domestic product). Also, the mid-cap indices have already witnessed a 30 per cent correction from the peak, and at that valuation offer a 5-6 per cent incremental growth over the Nifty50. Where do you see opportunities in the current market? Our strategy for many years has been directed towards companies offering consistent growth and not witnessing huge technological disruptions. Also, this consistent growth should be brought to the shareholders’ fund, a high level of return on equity (ROE). In the current market, the opportuni- Predicting foreign flows in the country’s markets is not a very smart way to spend one’s mental bandwidth; the flow can swing both ways. At the same time, with the number of interest rate hikes in the US not going to the level of four, as predicted at the start of the year, we remain hopeful. Consistent performance The fund has consistently outperformed its benchmark (CRISL Short Term Bond Fund Index) and peers (funds ranked under the credit risk MID-CAPS AT CURRENT PRICES OFFER A HEALTHY MIX OF VALUATION COMFORT AND GROWTH COMPOUNDING FOR MANY YEARS TO COME. THIS SEGMENT OFTEN OFFERS NON-LINEAR GROWTH TRAJECTORIES, WHICH ARE RARE IN THE LARGE-CAP SPACE ties are primarily around the consumption space; companies servicing this appetite will gain the most. How comfortable are you with market valuation at this stage? The current market valuation at 17 times is not in a very cheap zone, but the same was in the vicinity of 19 times, just a few months back. So, a reasonable correction has already happened. At the current valuations, we do not expect much re-rating. However, a low modified duration to reduce exposure to interest rate risk. https://t.me/TheHindu_Zone_official Investors buy rating agency stocks Shares of rating agencies, which had come under pressure on concerns of a slowdown in business and tighter regulations, seem to be getting back in favour among domestic investors. On Thursday, Reliance Mutual Fund bought ~66 crore worth of shares of Icra. The scrip has seen a correction of 20 per cent in the last six months. Earlier, liquidity squeeze in debt markets had stoked fears that fresh bond issuances would significantly drop, slowing down the revenue growth of the rating agencies. Moreover, following the default of Infrastructure Leasing & Financial Services (IL&FS), the role of rating agencies has come under the scrutiny of regulators, which are both reportedly working together to improve the rating standards in India. JASH KRIPLANI Ahead of peers on the returns front funds category in CMFR in December 2018) over the trailing periods under analysis. It significantly outperformed its benchmark and peers during the one-year, the two-year and the three-year trailing periods. A sum of ~10,000 invested in the fund on December 07, 2011, (inception of the fund) would have grown to ~19,465 (9.6 per cent CAGR) on March 12, 2019, as compared with ~18,064 (8.48 per cent CAGR) for the peer group and ~18,036 (8.46 per cent CAGR) for the benchmark. A systematic investment plan (SIP) is a disciplined mode of regular investments SIGNS The retail investors who remained invested have gained one of the best returns any asset class has generated. Also, the message has gone down to the retail investors that the best way to gain from equities is to take the route of systematic investment plans (SIPs). The retail flows can definitely get better once the uncertainty recedes, and the gains on the broader indices are optically visible. What about foreign flows? [FUND PICK] FRANKLIN INDIA CREDIT RISK FUND Launched in December 2011 as Franklin India Corporate Bond Opportunities Fund, the scheme was renamed Franklin India Credit Risk Fund in June 2018 and repositioned as a credit risk fund after the reclassification and rationalisation of mutual fund schemes by the Securities and Exchange Board of India (Sebi). The scheme featured in the top 30 percentile of the credit risk category in the CRISIL Mutual Fund Ranking (CMFR) for the three quarters ended December 2018. Santosh Kamath (CIOfixed income) is managing the fund for more than four years now; he has over 23 years of experience. Kunal Agrawal is co-managing the fund since October 2018. The fund’s investment objective is to provide regular income and capital appreciation through a focus on corporate securities. STREET offered by mutual funds to investors. A monthly SIP of ~10,000 in the fund over seven years (an investment of ~8.4 lakh) would have grown to ~11.5 lakh, earning 8.98 per cent per annum as of March 12, 2019. A similar investment in the benchmark would have grown to ~11.13 lakh at 8.04 per cent per annum. Duration management The fund maintained modified duration in a narrow range of 1.47 years to 2.34 years during the past three years, averaging 1.81 years. The fund focuses on credit calls to generate returns and maintains Portfolio analysis During the past three years, the fund maintained a predominant allocation to NCDs and bonds, averaging 96.57 per cent. Exposure to money market securities (CDs and CPs) averaged 2.44 per cent. The fund has the mandate to invest 80 per cent or more of the portfolio in AA and below rated corporate bonds. Its allocation to sub-AA+-rated securities averaged 91.25 per cent during the past three years. Exposure to A+ and below rated securities averaged 67 per cent; the AA category securities exposure averaged 26.62 per cent during the same period. The fund did not take exposure to sovereign securities during the period under analysis. It maintained an average 6 per cent allocation to the highestrated corporate bonds (AA+ and above /A1+) during the past three years. pick-up in the earnings momentum will ensure that anyone investing in the markets from a two-three year perspective will not be disappointed. The markets can easily offer a better return than nominal growth of the GDP. That said, in the long-term, the markets which are a slice of corporate India, will offer a rate of growth in conjunction with the GDP growth rate. How convinced are the retail investors about market stability? What are the plans for Emkay’s different business verticals, especially wealth management and broking segments? India will soon cross $2,000 in per capita GDP, which is where the demand for wealth management products generally witnesses a proverbial point-of-inflexion. We are preparing for such slow-grinding, but tectonic shifts in individual wealth creation, and preservation behaviours. Our two decades of understanding of equities, and other asset classes, positions us uniquely to capitalise on this opportunity. Also, there is always an opportunity for cross-selling and trailing fee incomes. Prediction of growth rates is based on multivariate analysis, so offering a quantitative figure will not be a prudent thing. Many Nifty stocks still offer value SAMIE MODAK With the Nifty nearing all-time highs, valuation for the 50-share bluechip company index has moved above historical levels. The index currently trades at nearly 18 times its estimated one-year forward price-to-earnings (P/E), higher than the 10-year average of 16 times. Price-to-book (P/B) for the index also is currently 2.5 times compared to historical average of two times. However, a deep-dive into valuations of individual scrips suggests the market still offers value. Only 14 Nifty stocks trade at a premium to their historical average on oneyear forward P/B and 18 on a oneyear forward P/E basis, according to BNP Paribas. Companies where valuations are currently above their historical levels mostly belong to sectors such as financial, FMCG and IT services. “Beyond a select few stocks, valuations have fallen for several Nifty names and much more so for those outside the Nifty,” says Abhiram Eleswarapu, head of India equity research, BNP Paribas India. The Nifty companies that are much below their historical CRISIL Research https://t.me/TheHindu_Zone_official HOW THEY STACK UP Nifty stocks that are quoting at a premium and discount to their historical P/E Grasim Bajaj Finserv Bajaj Finance Reliance Ind Titan ONGC Indiabulls Fin. Eicher Motors Tata Steel Yes Bank In % -40 Chinks in price discovery armour Stock exchanges have strict trading guidelines for newly-listed companies. For instance, a stock listing through a demerger, can move only in a 5 per cent band for 10 days. The band is applicable on the price discovered after a 45-minute pre-open session. The framework is aimed at curbing volatility and better price discovery. However, the recent listing of Arvind Fashions, which was demerged from Arvind, has exposed some chinks in the armour. The discovered price for the apparel retailer was less than half its fair value price. As a result, the stock hit 5 per cent upper limit for five straight days post its listing. Real price discovery for the stock will take place once the 10-day price band period gets over, said a broker. SAMIE MODAK > EVENTS THIS WEEK Date Particulars 18-Mar India BoP CAD figures* US-NAHB housing market index UK Rightmove house prices figures 19-Mar UK ILO unemployment rate UK employment change 20-Mar US FOMC rate decision UK CPI & core CPI UK RPI & retails price index UK house price Index 21-Mar US leading index UK Bank of England bank rate UK public finances figures 22-Mar US Markit PMI manufacturing services and composite US home sales figures Source: exchange/websites/Bloomberg Compiled by BS Research Bureau > COMMODITY PICKS SOY BEAN -20 0 20 40 P/E include Tata Steel, Eicher Motors and ONGC. Meanwhile, the companies below their historical P/B are Tata Motors, Eicher Motors, Sun Pharma and Indiabulls Housing Finance. On the other hand, the P/E multiple of Grasim, Reliance Industries, Titan and Hindustan Unilever is higher than their historical average. Soy bean prices at the benchmark Indore markets are trading at ~3,746 per quintal. For the week ahead, prices are expected to head towards ~3,685 per quintal. Weak processors demand due to lack of fresh meal export deals to weigh on prices. Prerana Desai, VP-Research -Edelweiss Agri Services and Credit, Edelweiss Agri Value Chain https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official 16 POLITICS & PUBLIC AFFAIRS "Weak Modi is scared of Xi. Not a word comes out of his mouth when China acts against India" MUMBAI | MONDAY, 18 MARCH 2019 “This 'jhoola' diplomacy is so fantastic that China refuses to cooperate in blacklisting this terrorist (Masood Azhar)" RAHUL GANDHI, Congress president 1 "...Leaders who describe this (China blocking banning of Masood Azhar at the UN) as our diplomatic failure may see for themselves that in 2009, India was alone. In 2019, India has worldwide support" ASADUDDIN OWAISI, AIMIM president SUSHMA SWARAJ, external affairs minister > . In uncharted waters not show much interest. Experts feel minorities, especially Muslims and Christians who have been voting for the DMK, may prefer Haasan over the Dravidian party. The Lok Sabha and the assembly by-polls will test the next generation leaders of the AIADMK and the DMK, besides a few other prominent faces Sabareesan An unexpected, but not surprising new entrant who is still not fully in the limelight is the DMK president’s son-in-law Sabareesan, who is said to be liaisoning between his party and its allies. Sabareesan’s role in the party and its alliance has been more tangible in recent times, especially with the elections on the cards, said experts. The communication between the DMK and its ally Congress was earlier mostly managed by Kanimozhi, daughter of Karunanidhi. Some senior party leaders are not pleased with the emergence of a new power centre, they said. According to reports, when the DMK initiated talks with the Congress, a three-member team met Congress President Rahul Gandhi. Those were Kanimozhi, T R Baalu and Sabareesan. Sabareesan, it is rumoured, also has a say in the selection of candidates. When Reliance Industries Ltd (RIL) Chairman and Managing Director Mukesh Ambani and his wife Nita Ambani visited Stalin at his residence recently, the couple was received by Sabareesan. T E NARASIMHAN T he upcoming Lok Sabha election and by-polls for 18 Assembly seats in Tamil Nadu are not only a test of leadership for the ruling All India Anna Dravida Munnetra Kazhagam (AIADMK) and the Opposition Dravida Munnetra Kazhagam (DMK), but also for the next generation leaders of these two parties, besides prominent faces like T T V Dhinakaran and Kamal Haasan. After the demise of AIADMK supremo J Jayalalithaa and DMK chief M Karunanidhi, both the Dravidian parties are facing the first big election under the new leadership. While the AIADMK is led by Tamil Nadu Chief Minister E K Palaniswami and his deputy O Panneerselvam, the DMK is spearheaded by M K Stalin. There will be a few faces, who were working behind the scenes so far, coming out into the open and representing their respective parties during these elections. T T V Dhinakaran V K Sasikala’s nephew and AIADMK rebel leader Dhinakaran had won the R K Nagar seat in 2017, defeating both the AIADMK and the DMK. Following Jayalaithaa's death and Sasikala's imprisonment in a disproportionate assets case, the Sasikala faction named Palaniswami chief minister and Dhinakaran the leader of the party. However, Palaniswami joined hands with the Panneerselvam group and expelled Dhinakaran to take over the name and the party symbol. Dhinakaran floated the Amma Makkal Munnetra Kazhagam (AMMK). It may tie up with a few regional parties ahead of the polls. While he may not be able to make any inroads in the Lok Sabha, he may split the AIADMK votes in favour of RUN-UP TO ELECTIONS 2019 the DMK in the by-elections. The AMMK representative said that the outfit is targeting at least 10 seats. Dhinakaran's caste could play a major role in getting votes for his party. He is a Thevar, a dominant OBC community in southern Tamil Nadu. There is a perception that the Thevars leaned towards the AIADMK in the past only because of Sasikala's family. This notion will be put to the test as Paneerselvam also belongs to While MNM of Kamal Hasan (top left) will look to target Muslim and Christian voters, T T V Dhinakaran’s AMMK will battle it out against the AIADMK for Thevar votes. (In inset) Vijayakanth (right) with son Vijay Prabhakaran, who is also set to take the politicial plunge the same community. Kamal Haasan The actor-turned-politician said that his party Makkal Needhi Maiam (MNM) is open to aligning with likeminded parties, but so far, he has failed to ink a deal with any of the major par- STORY IN NUMBERS (1) AGRA R S Katheriya Margin: 300,263 283,453 134,708 34,834 (2) BAHRAICH Savitribai Phule Margin: 95,645 96,904 336,747 24,421 THE PUZZLE OF RESERVED SEATS IN UTTAR PRADESH A total of 131 seats (18.42 per cent) of the 545 Lok Sabha seats are reserved for representatives of Scheduled Castes (84) and Scheduled Tribes (47). These seats are reserved in proportion to the SC/ST population as a share of the total population in a state. According to the 2011 census, these sections comprised about 16.6 per cent and 8.6 per cent, respectively, of India's population. For the first time in the 2014 parliamentary elections, the BJP won the largest number of seats in these constituencies — 66 of the 131 seats. This is also the highest number of reserved constituency seats won by any single largest party ever, since 1991. The BJP retained almost 88 per cent of the seats it had won in 2009. Uttar Pradesh, which has the Ravindranath Kumar Panneerselvam's son O P Ravindranath Kumar has sought a Lok Sabha ticket from the Theni or Virudhunagar constituency in southern Tamil Nadu. While there is criticism over the deputy CM seemingly promoting his son, Kumar rubbishes the perception. "I have been working for the AIADMK since I was 18. Now I am 39. It's only with the right of a genuine and committed party worker that I have sought the ticket," he says. highest scheduled caste population and where the Bahujan Samaj Party (BSP) and the Samajwadi Party (SP) have traditionally had a strong following, saw the same trend: The BJP won swept all the 17 reserved constituencies in the state in 2014. The SP, which had 10 seats in 2009, could not retain even a single SC seat. This time, there is an alliance between the SP and the BSP. Central to this is a seamless vote transfer. The evidence suggests that if the SP and the BSP votes are added, in several cases the combination will trounce the BJP. But such was the party’s stupendous performance that this will not apply in all cases. Either way, in the reserved seats, at least, the BJP may suffer: If arithmetic is all that goes into an electoral victory. (3)BANSGAO Kamlesh Paswan Margin: 189,516 133,675 133,534 50,675 (4)BARABANKI Priyanka Singh Rawat Margin: 211,878 167,150 159,284 242,336 (5)BULANDSHAHAR Bhola Singh Margin: 421,973 182,476 128,737 (6)ETAWAH Ashok Kumar Doharey Margin: 172,946 192,804 266,700 13,397 (7)HARDOI Anshul Verma Margin: 81,343 279,158 276,543 23,298 Vijay Prabhakaran Desiya Murpokku Dravida Kazhagam (DMDK) leader Vijayakanth’s son Vijay Prabhakaran is also set to take the plunge into active politics this election season. The party has joined the National Democratic Alliance and is set to contest four seats in the Lok Sabha election. ties or alliances, including the DMKCongress alliance. The DMK and Haasan are almost on the same page in terms of their ideology regarding Hindutava and in their anti-Brahmin mindset. However, when there were talks between the Congress and the MNM, the DMK did BJP CONSTITUENCIES RESERVED FOR SC (11)LALGANJ Neelam Sonkar Margin: 63,086 233,971 260,930 21,832 BSP SP Cong BJP 15 (12)MACCHLISHAHAR Ram Charitra Nishad Margin: 172,155 266,055 191,387 36,275 7 5 17 13 4 12 2 11 3 BJP 8 BJP 1 9 14 110 16 6 BJP BJP BJP (8)HATHRAS Rajesh Kumar Diwakar BJP Margin: 326,386 217,891 180,891 (9)JALAUN Bhanu Pratap Singh Verma BJP Margin: 287,202 261,429 180,921 82,903 (10)KAUSHAMBI Vinod Kumar Sonkar BJP Margin: 42,900 201,322 288,824 31,905 BJP BJP (13)MISRIKH Anju Bala BJP Margin: 87,363 3,25,212 194,759 33,075 (14)MOHANLALGANJ Kaushal Kishor BJP Margin: 145,416 309,858 242,366 52,598 (15)NAGINA Yashwant Singh BJP Margin: 92,390 245,685 275,435 (16)ROBERTSGANJ Chhotelal BJP Margin: 190486 187725 135,966 86,235 (17) SHAHJAHANPUR Krishna Raj BJP Margin: 235,529 289,603 242,913 27,011 Source: Election Commission of India NEWSMAKER / CHANDRASHEKHAR AZAD Modi vs Raavan in Varanasi? ADITI PHADNIS their constitutional rights and they will no longer tolerate Will Chandrashekhar Azad (or oppression. The Bhim Army is Raavan, the name he has given not to scare off anybody but for to himself) be the Opposition the security of Dalits,” Raavan candidate against Prime said in a recent interview. Minister Narendra Modi in Raavan’s troubles started in Varanasi? Congress leader 2015, when he put up a board Priyanka Gandhi Vadra’s recent outside his village which promeeting with him has everyone claimed: ‘The Great Chamars talking about this. You need to of Dhadkauli Welcome You’. In be exceptionally brave to fight a village that also had Thakurs, Modi in Varanasi and Raavan how could this be tolerated? certainly is. The Thakurs defaced this. This On the face of it, Raavan is began a phase of confrontation, fighting everyone. He was born which peaked when the BJP in Dhadkauli village of took out a ‘Shobha Yatra’ in Saharanpur in a Dalit family, Saharanpur without permisstudied at a Thakur-owned col- sion through communally senlege in nearby Chhutmalpur, sitive areas. Dalit-Thakur clashwitnessed the discrimination es broke out a few weeks later against Dalit students and in the district on the birth vowed to fight it. Being an anniversary of the Rajput king, Ambedkarite and an admirer Maharana Pratap. The state of Kanshi Ram (but not of government held the Bhim Mayawati), he tried to follow Army responsible for inciting the same principles of organ- violence even as Raavan rejectising the Dalits as Kanshi Ram: ed the allegation. He was arrestVia education, through the ed, but the high court acquitted bureaucracy and in self- him. But within hours, the Yogi defence. He founded the Bhim Adityanath government Army and set up ordered his re400 Bhim Army There is speculation arrest under the schools in Saha- that ‘Raavan’, chief National Security ranpur district of the Bhim Army, Act. He was incarwhich provide could be the cerated amid masfree-of-cost pri- Opposition sive protests by mary education. candidate against civil rights groups He started self- PM Narendra Modi and released only defence classes in Varanasi recently. and led bike rides Saharanpur is through villages — including well-known for Dalit mobilisaupper caste Thakur villages — tion and the unity among as symbolic self-assertion. Muslims and Dalits. This project This is important. Uma has been endorsed by many Bharati, a sadhvi from the Lodh activists. According to Chandra caste who rose to become a Bhan Prasad, noted writer and Union minister, once recalled Dalit thinker, “There are around how, in her village Tikampur, 400 Lok Sabha constituencies others from her caste could not where the Dalit-Muslim comcycle past the homes of bine constitutes 30 per cent of Thakurs. They had to dismount the electorate. Also bear in and walk past on foot: Because mind that 90-95 per cent of the Thakurs saw this assertion Dalits and Muslims go out and as an affront. That was 25 years vote. So, if they are able to come ago. Nothing has changed. together, they become signifiThe Bhim Army asks Dalits cant electorally.” Raavan has over 18 to join them. Most of emerged as a face of this unity, the members belong to the even though he is not that well community of leatherworkers known in the rest of India. or its sub-caste Jatav. But the Little wonder then, that the Bhim Army also welcomes Congress is reaching out to Muslims. It lacks a formal struc- him. His party is unrecogture and is an unregistered nised. And the Congress sees body, but claims to have over in him the same political 20,000 members in and potential as Hiralal Alawa, around Saharanpur. Its stress convenor of tribal political outis on direct action based on fit Jai Adivasi Yuva Shakti, confrontation to preserve, pro- who was a key factor in swingtect or restore the dignity of ing tribal votes towards the Dalits. “Through the Bhim Congress in MP. Army, the Dalit youth become Will Chandrashekhar Azad aware that they can struggle for ‘Raavan’ have the same effect? Yogi faces litmus test expansive canvas to govern and also extend the party’s base in the state. Now having completed two years as chief minister, the report card of Adityanath is at best a mixed one. Even as the saffron party won 14 of the 16 monastic order, had been acknowledged urban local bodies mayoral posts in to have wielded influence over 12 eastern December 2017, the BJP suffered defeats UP districts, including Deoria, Basti, Sant in all the three parliamentary Kabir Nagar, Maharajganj, and one assembly by-polls Sant Kabir Nagar and held last year, including his Siddharth Nagar. own turf of Gorakhpur. As things turned out, the While Adityanath prefers BJP and allies, riding on the to discount these defeats by euphemistic “Modi wave” and noting they did not alter the aided by the division of votes, constitution of his governwent on to score a stupendous ment, the fact that the ruling victory at the hustings, winparty lost these by-polls with ning 325 of the 403 seats. Adityanath at the helm had Adityanath, on the basis of put a big question mark on his preference of the party’s electability to deliver in highed legislators, was anointed the 21st chief minister of the UTTAR PRADESH octane contests. In this backdrop, the Lok country’s most populous state. Sabha polls are an acid test for The firebrand Hindutva Adityanath to prove his merit as a politileader, who had shared rather bittercal leader, possessing the capacity to sweet relations with the BJP owing to his deliver beyond his traditional pocket larger-than-life image in eastern UP boroughs of Gorakhpur and adjoining pockets, was suddenly entrusted with an He became an unexpected chief minister in 2017. Now he has to justify his party was not wrong VIRENDRA SINGH RAWAT In the run-up to the Uttar Pradesh Assembly polls in 2017, which subsequently morphed into a triangular contest between the Congress-Samajwadi Party (SP) combine, the Bahujan Samaj Party (BSP) and the Bharatiya Janata Party (BJP), speculation was rife about then Gorakhpur MP Yogi Adityanath, lobbying for tickets for his candidates in about a dozen constituencies in eastern UP, or Purvanchal. It was no secret that Adityanath and his supporters, predominantly comprising the influential Hindu Yuva Vahini (HUY), a self-acclaimed social and cultural organisation founded by him, were at the same time peeved at the BJP not projecting him as the party’s chief ministerial candidate. Adityanath, who is also the presiding seer of the powerful Gorakshnath Peeth https://t.me/TheHindu_Zone_official STATE SCAN The report card for the two years of the Yogi Adityanath government has been mixed districts. The coming together of the SP and BSP just ahead of the crucial elections has made the path tougher for Adityanath, considering these two opposition parties represent 42 per cent of the vote in the state. Interestingly, the “trial by fire” for him becomes even tougher since he is up against the charm offensive of the Congress general secretary in charge of https://t.me/TheHindu_Zone_official eastern UP, Priyanka Gandhi, who had recently led an impressive road show in Lucknow, alongside his brother and party president, Rahul Gandhi. Political commentator Sharat Pradhan told Business Standard there was more hype around the personality of Adityanath than what was real. “He has been touring other states for campaigning, but hasn’t done any magic so far.” The BJP faced poll reverses in Hindi heartland states of Rajasthan, Madhya Pradesh and Chhattisgarh, where Adityanath had addressed nearly 75 rallies, even as the opposition criticised him for allegedly neglecting UP while electioneering in other states. Further, Pradhan said the phenomenon of stray cattle destroying crops in rural areas would hit the poll prospects of the BJP. “There is a strong undercurrent of anger among farmers, especially small agriculturists, since their livelihood is getting affected due to the menace of ever-increasing stray cattle.” In contrast, Adityanath has been religiously talking about the successful holding of the UP Investors Summit 2018 and Kumbh in Prayagraj in 2019. Nonetheless, the Opposition has been sharpening attacks on his government over rising crime, including crime against women. A senior Congress leader slammed the government for functioning like an “event management company” and trying to conceal its failures. The accusation of graft and impropriety against the personal secretaries of three UP ministers, caught in a sting operation by a news channel in December last year, had put the state government in the dock. https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official BUSINESS LAW 17 MUMBAI | MONDAY, 18 MARCH 2019 < . BRIEF CASEN l M J ANTONY A weekly selection of key court orders Pre-deposit demand for arbitration illegal A condition in a notice of tender demanding a pre-deposit of 10 per cent of the claim for invoking arbitration is illegal and arbitrary, the Supreme Court ruled last week in its judgment, Icomm Tele Ltd vs Punjab State Water Supply Board. Such a condition will discourage parties from taking the route of an alternative dispute resolution process. The judgment of the Punjab & Haryana High Court which took a contrary view was struck down. In this case, the board invited tenders for augmentation of the water supply and sewerage system in the state. Icomm was selected. When disputes arose, the terms of the contract were challenged. According to the board, the party invoking arbitration shall “deposit at call” 10 per cent of the claim to avoid frivolous demands. The Supreme Court stated that 10 per cent of a huge contract will amount to a large sum. It will deter an aggrieved party from invoking arbitration. It would act as a ‘clog’ according to the law of contract, while the arbitration law is meant to de-clog the courts burdened with huge arrears. “Any requirement to deposit would certainly amount to a clog on this process. Also, it is easy to visualise that often a deposit of 10 per cent of a huge claim would be even greater than court fees that may be charged for filing a suit in a civil court.” The judgment pointed out that if there are frivolous claims, the arbitrator or the court can impose a deterrent penalty on the guilty party. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Tax demand against dissolved firms A claim of income tax will not become infructuous even if a company’s name has been struck off by the Registrar of Companies, according to the Supreme Court. The Companies Act and the Income Tax Act deal with such situations and those provisions should be followed. The Rajasthan High Court had dismissed the appeal of the Commissioner of Income Tax against the order of the appellate tribunal in the case of Gopal Shri Scrips Ltd. The high court had ruled that nothing survived in the case as the company was dissolved. Reversing that judgment, the Supreme Court stressed that the method prescribed in the two Acts should be adhered to in this case. The Supreme Court asked the high court to reconsider the appeal. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> NCLAT must hear party before order The Supreme Court has set aside the order of the National Company Law Appellate Tribunal, New Delhi (NCLAT), in an insolvency case as it had not followed the rule of granting the opposite party an opportunity of presenting its case. In this case, Jai Balaji Industries Ltd vs State Bank of India, the appellate tribunal had asked the NCLT, Kolkata, to admit an application moved by the bank against the company. The latter appealed to the Supreme Court arguing that the appellate tribunal’s order was passed without hearing it. The bank defended the order contending that it had given an advanced copy of the appeal and documents to the company. The court rejected that contention stating that though the bank had served an advanced copy of the appeal on the company, it could not be treated as service of notice as stipulated under Rule 48 of the NCLAT Rules. The appeal and other documents shall be served along with the notice on the other side. An advanced copy would not fulfil the requirement of natural justice, the judgment emphasised, while remanding the matter to NCLAT. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Compounding in electricity theft cases Criminal proceedings in cases of theft of electricity have to be separately dealt with even if there is a settlement between the supplier and the consumer. The Electricity Act provides for compounding of the offence of theft under Section 152 but that proceeding must be gone through even after the settlement, the Supreme Court stated in its judgment in Mukesh Chand vs State of Delhi. The power distributor, BSES, found that there was theft of electricity by an industrial unit and therefore, slapped a bill for ~3.5 lakh on it. Since it did not pay the amount, a criminal case was filed against it. Later the matter was settled in a Lok Adalat and he paid ~1.6 lakh according to the agreement. He then moved the Delhi High Court for quashing the prosecution as he had paid the amount according to the settlement. The high court dismissed his petition. On appeal, the Supreme Court set aside the high court order and asked it to decide his case according to the provision for compounding of offences in the Electricity Act. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Wrong order, but no recovery from staff An employer who wins a case against an employee cannot recover from the employee the amount already paid during the litigation, even if it is substantial. The Supreme Court stated so in the appeal, Dilip Mani vs M/s Siel Ltd. In this case, the employee challenged his termination before the industrial tribunal in Uttar Pradesh. The tribunal ordered his reinstatement with back wages in 1998. The firm appealed to the Allahabad High Court arguing that he had not completed one year of employment. The high court accepted it and held the tribunal was wrong in 2007. The employee appealed to the Supreme Court. It declined to examine the facts of the case and dismissed the appeal last week. During the litigation, the employer had paid dues according to the order of the tribunal. The Supreme Court ruled that though the tribunal order was wrong, the employer had no right now to recover the amount already paid to the “delinquent workman”. >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Diagnosis of delays in commercial courts The Delhi High Court last week lamented that cases in commercial courts are unnecessarily being delayed because of the lax attitude of lawyers. The judgment in the case, Vifor International Ltd vs Suven Life Sciences Ltd, starts with a long narration of the maladies affecting commercial suits. Parliament passed the Commercial Courts Act, 2015, intending to speed up disposal of suits. But a series of lawyer-made obstacles are put before the court tending to make the legislation “a mere piece of paper”. The judgment listed a series of hurdles which delayed disposal of suits. For instance, petitions are not drafted precisely, spelling out the basis of the claim or defence. These lead to unnecessary pleas being raised later and irrelevant issues being framed and evidence led in them. Lawyers should prepare a blueprint in the beginning. It is often found that parties and counsels themselves, owing to lack of attention, do not understand their own claim/defence. Such conduct leads to a plethora of applications being filed to make up the lacunae. https://t.me/TheHindu_Zone_official Implant victims lack legal backing The regulator’s ruling on compensation has to be backed by statutory provisions in law AASHISH ARYAN HOW THE J&J CASE UNFOLDED I n a first of its kind ruling, the Central Drugs Standard Control Organization (CDSCO) recently asked Johnson and Johnson (J&J), a US-based company, to pay a hefty penalty of nearly ~75 lakh to an unidentified Mumbai-based victim of a faulty hip implant. In November, the government had come up with a compensation formula based on factors such as age, risk and percentage of disability. The quantum of compensation recommended in such cases varied from ~30 lakh to nearly ~1.2 crore. Experts, however, doubt the ability of the government, and the regulator, to actually realise the penalty amount from the company in the absence of statutory legal provisions to back this decision. “The government order asking J&J to pay compensation is complete hogwash. There is no provision (in law) under which the government can do so,” says Prashant Reddy, senior resident fellow at Vidhi Centre for Legal Policy. There is no law that empowers the government to order one private party to pay a certain amount to another private party, he adds. Most legal experts expect J&J to challenge the ruling by the regulator. A senior advocate notes that in US companies such as J&J pay hefty fines to settle legal cases because of the high cost of litigation. “India will see many rounds of legal battle,” he says. Experts say it is unlikely that the compensation suggested by the regulator will become a precedent and help other victims to claim compensation easily. “The process of claiming relief by claimants is painstaking because it is not easy to establish negligence, especially under criminal laws,” says The US 2010: DePuy, a manufacturer for J&J recalls, 93,000 ASR hip-replacement systems 2013: DePuy stops selling ASR hip-replacement systems after the US FDA tightens rules J&J says it has paid $2.5-billion ASR settlement to around 8,000 patients in the US 2013-2019: Nearly 10,400 lawsuits filed in the US over the failure of device 2019: J&J pays $120 million to resolve deceptive marketing claims made in the US India 2010: The CDSCO gives DePuy’s fresh imports licence for implants on the basis of renewed registration 2011: The CDSCO asks J&J for details of compensation paid to victims; the company says the information is confidential 2012: The CDSCO cancels import of J&J ASR hip-replacement system 2013: DePuy stops selling ASR hip-replacement systems after the US FDA tightens rules 2014: CDSCO receives patient grievances on ASR implants, takes it up with company 2017: An expert committee of the health ministry formed to look into the issue 2018: The expert committee makes report public, suggests ~33 lakh as minimum penalty 2019: The government accepts the committee report, says the firm must pay within 30 days The CDSCO asks J&J to pay a penalty of nearly ~75 lakh to a Mumbai-based victim Atul Pandey, partner at law firm Khaitan & Co. Experts say the only legal compulsion for paying compensation can come through a court case invoking tort law or product liability law or consumer protection law. Most experts, however, believe that the formula suggested by the government is a start. Since the Supreme Court accepted the formula suggested by the government, it could become a precedent, notes Rajdutt Shekhar Singh, partner at law firm Singh and Associates. “In case, any similar matter arises in the future, the procedure adopted by the government in the J&J case would be considered as a precedent in determining the quantum of compensation,” Singh adds. The Drug Technical Advisory Board (DTAB), set up by the government last year, suggested including compensation for victims suffering from faulty implants in the law. Though the Medical Devices Rules of 2017 could be amended for this purpose, dedicated legislation that deals with compensation laws for aggrieved patients and users of medical devices will help ease the burden of proof that currently lies squarely on the patient, says Pandey. Though the new medical devices rules talk about compensation in cases of clinical investigation-related death, the rules for victims of faulty medical devices and implants are absent. The lack of a proper legal framework notwithstanding, the Indian medical consumer is also largely unaware of his or her right, say experts. “The consumers in the West are more aware of their rights associated with health care, along with the seriousness accorded by the courts to such cases. Therefore, we see a larger number of medical malpractice compensation claims in countries like the US and the UK,” says Pandey. In the J&J hip implant case, instead of each victim approaching the courts in their individual capacity, the government could file a collective case on behalf of the patients, suggests Reddy. “For individuals to prove that a medical device causes a problem requires an expert certifying the same. Now, that cannot obviously be done for free. The government should get such experts and it will help bring down the costs for victims,” he says. According to experts, this can be done under Section 12(1)(d) of the Consumer Protection Act of 1986 that empowers the central or the state government to take up the case, either in its individual capacity or as a representative of interests of the consumers in general. ILLUSTRATION: AJAY MOHANTY How taxation skews share buyback over dividend payout Hiren Bhatt, partner–deal advisory, M&A tax and private equity tax, KPMG in India, explains the differences in tax treatment of share buyback and dividend payout Is the tax treatment of share buyback by a company different from dividend payout? What would be the tax treatment when a listed company undertakes buyback of its shares? The Income-tax Act, 1961 (the Act), provides for different tax treatment both for share buyback and dividend payout. While dividend has been subject to dividend distribution tax, to be paid by the company, taxation of buyback would depend upon whether it is a buyback of listed shares or unlisted shares. Also, both dividend and buyback would have different tax treatment in the hands of the shareholders. With regard to listed companies, two scenarios of taxability arise. When a buyback is not conducted through stock exchanges and securities transaction tax (STT) is not paid, long-term capital gains on buyback is subject to tax in the hands of the shareholder at 20 per cent with indexation, or at 10 per cent without indexation. Further, when STT is paid, long-term capital gains will be taxed at 10 per cent. Short-term capital gains in the above two scenarios i.e. without and with STT payment, will be taxed at applicable slab rates and 15 per cent, respectively. Is a company liable to pay any tax when it declares the dividend to its shareholders? When any company declares the dividend, whether interim or final, such dividend is subject to dividend distribution tax (DDT) at the effective rate of 20.56 per cent on the payout. Will such dividend be also taxed in the hands of the shareholders? Yes. Any dividend receipt above ~10 lakh is taxable at 10 per cent in the hands for certain categories of shareholders, like individual, Hindu Undivided Family and firm. What are the tax implications for unlisted companies when buyback of its shares is undertaken? Buyback of shares undertaken by an unlisted company is governed by the specific provisions of Section 115QA of the Act. As per these provisions, any unlisted company undertaking buyback of its shares will pay buyback tax at the rate of 20 per cent on the difference between the consideration paid by the company to the shareholders on the buyback and the amount received by the company on the issue of such shares. This section is akin to dividend distribution tax wherein responsibility is cast on the company to pay the tax. It is important to note that cost-step up and indexation available to shareholders cannot be considered by the company while computing the amount of buyback tax payable. This may adversely impact the taxation on the buyback of shares acquired by shareholders through secondary acquisition. Will there be any taxation in the hands of the shareholders of an unlisted company undertaking the buyback? The Act provides for a specific provision which exempts income from a buyback in the hands of the shareholders, if the company has paid buyback tax under the Act. Does Section 115QA cover buyback of all kind of shares issued by an unlisted company? The term buyback (as defined under Section 115QA of the Act) was amended by the Finance Act 2016 to cover all types of buyback of unlisted shares within its purview, including preference shares. Will it be fair to say that the tax treatment is skewed in favour of share buyback vis-a-vis dividend payout? As discussed above, when a listed company undertakes buyback of its shares, the effective tax rate for its shareholder ranges from 10 per cent to 30 per cent on capital gains (as may be applicable) and for an unlisted company, the tax rate is 20 per cent with no tax on shareholders. In contrast, the aggregate taxation on dividend distributed by the company could be 20.56 to 30 per cent. So, there is no straight forward answer and depends on a case-to-case basis. All the tax rates mentioned (other than DDT) are exclusive of surcharge and cess. What should companies keep in mind when deciding between share buyback and dividend payout? While dividend payout largely depends on profits available for distribution, the buyback will be subject to multiple considerations as required under the Companies Act, 2013. Some of the key criteria for buyback of shares could be the debtequity ratio of the company, the availability of free reserves or securities premium account, the maximum cash payout and the maximum amount of paid-up capital which can be bought back. Also, if a listed company is carrying out buyback, the Sebi regulations will have to be appropriately considered. Needless to say, income-tax implications as discussed above would also have to be considered. Reflection on governance issues in IL&FS and L&T ACCOUNTANCY ASISH K BHATTACHARYYA Over the past few months, a spate of events occurred in the space of corporate governance presenting challenges in improving corporate governance and ethical standards being practised by companies. Those are worrying, but no solution is in sight. As per media reports, the government-appointed board has charged 14 former directors of group firm IL&FS Financial Services Ltd (IFIN) with facilitating money laundering, sanctioning loans in violation of rules and causing "huge financial stress and losses’’ to the company. Those serious allegations are based on the special audit report submitted by Grant Thornton. It reported numerous financial irreg- ularities in deals with financial implications of over ~13,000 crore. The company has issued notices, dated February 27, asking former directors as to why departmental and legal actions should not be taken against them for their "misconduct, dereliction of duties, gross negligence and acts of conspiracy and getting unlawful gains for oneself and others". Independent directors in the board that had been superseded by the government after a series of defaults by the company, included individuals of high repute like R C Bhargava, chairman of Maruti, Michael Pinto, a former secretary for Shipping, and Sunil B Mathur, former LIC chairman. It is likely that independent directors failed to apply due diligence, possibly because of lack of their understanding of the complex business model of the company. If independent directors fail to demonstrate that they had applied due diligence, they will be held liable for the omissions and commissions of the company. They may face imprisonment. Interestingly, the board that replaced the disgraced board of IL&FS is acting swiftly, decisively and effectively. In the case of Satyam also, the board that replaced the disgraced board did a wonderful job in bringing million to settle charges that it vioback the company from the crisis and lated the Foreign Corrupt Practices protecting its value. In both cases, Act (FCPA). The US Securities and the newly appointed boards are/were Exchange Commission (SEC) effective because their performance alleged that Cognizant authorised is/was measurable and is/was in pub- the construction firm to make lic view. Unfortunately, when the bribes to government officials in going is good or until the crisis does India. It has come out that the said not surface, the independent direc- construction firm is L&T. L&T has tor’s performance is not visible to decided to take the services of external experts to ascertain stakeholders. Therefore, whether its employees independent directors, In a society were involved in bribing in general, lack motivawhere corruption the government offition. A solution to motiis a non-issue, cials. Quite likely, evivational issues is yet to investors are not dence will not be availbe found out. Therefore, bothered about able, as companies have the use of the stick is the ethical standards learned the art of cononly solution. It will be of the company, cealing such payments interesting to observe if by aligning skilfully. If evidence is how the IL&FS story with the external available, the employees unfolds -- whether the environment, it will be made scapegoats company will proceed earns a profit to clean the image of the to take legal actions for them company. against the members of Ethical standard and the superseded board and if it proceeds, what view the values of institutions cannot be betcourt will take on the alleged failure ter than the ethical standard and of independent directors to apply values of the members of the system within which they operate. due diligence in decision making. The story of bribing government Corruption and crime are not officials by L&T on behalf of important issues in parliamentary Cognizant is also interesting. In the elections. Voters elect corrupt and second week of February 2019, criminals to represent them. In a Cognizant had agreed to pay $25 system (society) where corruption https://t.me/TheHindu_Zone_official is a non-issue, investors are also not bothered about ethical standard of the company, if by aligning with the external environment, the company earns a profit for them and manages the risk by skilfully doctoring the books and documents to avoid detection. It may be argued that mighty players like L&T should take the lead to eradicate corruption, but that is a difficult proposition in a fragmented industry like construction, where a large number of players of different sizes operates. The risk of spearheading the fight against corruption is to lose in the competition. As long as the eradication of corruption remains rhetoric for the government and political parties, both the government officials and companies will continue to adopt corrupt practices and investors will not bother too much about the same. Big names in the board do not provide comfort to stakeholders, as the practice of ‘lending names’ with token participation continues. A corruption-free India is yet a mirage, but we need to work towards it. The writer is director, Institute of Management Technology, Ghaziabad Email: asish.bhattacharyya@gmail.com https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official 18 MUMBAI | MONDAY, 18 MARCH 2019 1 > MANOHAR PARRIKAR DECEMBER 13, 1955 - MARCH 17, 2019 Defence reformer with a clean image M anohar Gopalkrishna Prabhu Parrikar, who passed away in Goa on Sunday evening, is remembered in the defence ministry and across the industry as a rare minister who grasped the daunting technological dimensions of the military. HisbackgroundasanIndian InstituteofTechnology(IIT)graduate andasachiefministerwithanexcellent trackrecordasanadministrator equippedhimtoinitiatedefence industryandpolicyreformsthatareonly nowbeginningtobearfruit. OnNovember10,2014,Parrikarleftas Goa’schiefministerandtookoverthe powerfuldefenceminister’spost, replacingArunJaitleywhohad functionedasastopgapfortheprevious fivemonths.Parrikarremaineddefence ministerforjust28months,returningto PanjimonMarch13,2017toheadthe newly-electedBharatiyaJanataParty (BJP)-ledcoalitiongovernment. “LikeAKAntonybeforehim,Parrikar cametothedefenceministrywitha reputationforpersonalhonesty.But Antonywaswaryofprivatecompanies andfeltcomfortableonlywiththepublic sector.Parrikarwasconfidentenoughto throwopenhisdoorstoprivatefirms, andtoco-optthemintobuildingIndia’s defencecapabilities,”saysatopcivil servantwhoservedunderParrikar. “His extraordinary passion and commitment to the public good brooked no short cuts or unholy compromises. A rare figure in public life, his absence will be sorely missed,” says former defence acquisitions chief Vivek Rae. Ininstitutingdefencepolicyreform, Parrikaroftenunderestimatedthe resistancefromentrenchedinterests. Consequently,heseldommethisselfimposeddeadlines,whetherincoming outwiththenewDefenceProcurement Procedureof2016,aMakeinIndiapolicy, ortheStrategicPartner(SP)policythat overtlyco-optstheprivatesectorinto defencemanufacture. Yet, many of these policies are now coming on stream and the credit goes to Parrikar, say defence ministry bureaucrats. “He was an affable, approachable, man-on-a-mission who devoted himself to deciphering and simplifying the complexities of defence acquisition policy,” recalls Rajindar Bhatia of the Kalyani Group. Parrikar’stenurewasnotwithout controversy,suchaswhenhestatedin May2015:“Wehavetouseterroriststo neutraliseterrorists.”Typically, Parrikarneverapologisedforthat statementorretractedit. However,Parrikarhadonlyalimited roleinthesinglebiggestdefence controversythatstilldogstheBJP-led government:thepurchaseof36Rafale fightersfromFrenchvendor,Dassault. Asnumerousreportshavenow established,keydecisionsrelatingto thatcontractweretakenintheprime minister’soffice(PMO)orbythecabinet committeeonsecurity(CCS),including thedecisioninearlyApril2015to announcethepurchaseduringPrime MinisterNarendraModi’svisittoParis thatmonth.Parrikarwasleftwiththe jobofdefendingthedealtothemedia. Heconsistentlymadeitclearthat,his supportnotwithstanding,thedecision tobuy36RafalewasModi’sandthePM shouldbe“givencredit” forit. AJAI SHUKLA “AN EPITOME OF INTEGRITY AND DEDICATION IN PUBLIC LIFE, HIS SERVICE TO THE PEOPLE OF GOA AND OF INDIA WILL NOT BE FORGOTTEN #PRESIDENTKOVIND" RAM NATH KOVIND, PRESIDENT "SHRI MANOHAR PARRIKAR WAS AN UNPARALLELED LEADER. A TRUE PATRIOT AND EXCEPTIONAL ADMINISTRATOR... HIS IMPECCABLE SERVICE TO THE NATION WILL BE REMEMBERED BY GENERATIONS. DEEPLY SADDENED BY HIS DEMISE. CONDOLENCES TO HIS FAMILY AND SUPPORTERS" NARENDRA MODI, PRIME MINISTER "I AM DEEPLY SADDENED BY THE NEWS OF THE PASSING OF GOA CM, WHO BRAVELY BATTLED A DEBILITATING ILLNESS FOR OVER A YEAR. RESPECTED AND ADMIRED ACROSS PARTY LINES, HE WAS ONE OF GOA'S FAVOURITE SONS" RAHUL GANDHI, CONGRESS PRESIDENT Goa BJP loses the Parrikar advantage ADITI PHADNIS New Delhi, 17 March OneofIndia’smostunassuming butmostcharismaticchiefministers, Manohar Parrikar, died last evening plunging the politics of Goa into chaos. Atrainedmetallurgicalengineer from IIT Bombay, Parrikar became defence minister when NarendraModicametopowerin 2014, but his induction in the Centre was, in some ways, a second thought. He took over in November 2014 from Arun Jaitley and while he came to Delhi and presided over a complex ministry with aplomb, his heart was always in Goa. Parrikar hated being com- pared to Modi but the career pathsoftheleadersweresimilar. He was like Modi, an RSS Pracharak, and his defence of Modiinhandlingthecommunal riotsinGujaratwasinteresting:he conceded riots should not have taken place at all, blamed the administrationforthemanddid not blame Modi as ‘Modi was, after all, a new CM’. He first became CM of Goa in October 2000 — raising the strength of the BJP from four MLAs in 1994 to 17 in 2002. But he could stay CM for just two years. He made several mistakes, lostpowerandwasbackinoffice four months later to rule as CM till 2005, when he lost the elections. In 2012, ahead of the https://t.me/TheHindu_Zone_official assembly elections, he made a specialefforttoreachouttoGoa’s Christian community: the BJP fielded six Christian MLAs and supportedtwoothers.Allwon.In 2017, assembly elections to the 40 member-house were held againandtheCongressemerged the single largest party with 17 MLAs. But Parrikar had moved back to Goa where the Congress lost three MLAs to the BJP, which formed the government. He became the CM again. Since then, politics in the state has been unstable, especiallyafterParrikarfellill.In2017, Vishwajit Rane was the first CongressMLAtoquitandhewas welcomed into the BJP and made a minister even before he was re-elected to the legislature. Two other Congress MLAs — Dayanand Sopte and Subhash Shirodkar — quit the party in October 2018, to join the BJP. They are facing by-elections to beheldalongwiththeLokSabha polls bringing the BJP on a par with the Congress at 14 MLAs each. However, with the death of BJP MLA Francis D’Souza in Februarythisyear,theCongress once again became the single largest party in the House. Another BJP MLA, Pandurang Madkaikar, is unwell and hasn’t been seen since he suffered a stroke in June 2018. In October 2018, too, the Congress staked claim to form the government and called for a floor test but its request was ignored by the Governor. Now, all indications are that the Congress will make another bid to form the government. The BJP’s ally, Goa Forward Party(GPF),hasalreadybegunto mount pressure. “We supported Manohar Parrikar, and not the party. So, in case of any eventuality, we will rethink (our support to the BJP),” Goa Forward Party chief Vijai Sardesai said two days ago. Three MLAs each of the Goa Forward Party, Maharashtrawadi Gomantak Party (MGP) and an Independent and a lone Nationalist Congress Party (NCP) legislator are supporting the BJP. https://t.me/TheHindu_Zone_official https://t.me/TheHindu_Zone_official