JAPAN’S MESSAGE TO ARUN JAITLEY: REMOVE $3-BN RETROSPECTIVE DEMAND
NEW DELHI: Japan has asked the Narendra Modi-led government to drop a $3-billion retrospective tax bill raised on Japanese companies operating in India, calling those “unreasonable” and “discriminatory”. It has said the demand could impact future Japanese investments in to India. Tokyo is hoping for relief in Union budget that finance minister Arun Jaitley will present in Parliament in July first week.
The tax demands include a massive $2-billion bill on Mitsubishi and an about $600-million bill on Honda. “Some of the Indian subsidiaries of the Japanese companies, such as Honda and Mitsubishi, are facing unreasonably huge tax demands”, notes a document prepared by Japan and sent to the Indian ministries of finance and commerce.
Tamaki Tsukada, minister, economic section, at the embassy of Japan, told the Indian Express that “these (tax demands) have created a lot of irritation and affected the interest of Japanese companies to invest in India”.
The concerns were raised by Japanese Prime Minister Shinzo Abe at the summit meeting with Prime Minister Manmohan Singh earlier this year. But despite a joint statement to create “predictability and transparency in terms of business environment, including tax administration”, the issue was left unresolved by the UPA government, Tsukada said.
While the tax demand on Honda under Section 40(a) (i) of the Income Tax Act is large, the demand on Mitsubishi at $2 billion (as big as the one on Vodafone) has been hotly contested by Japan.
The demand, as Tsukada explained, stretches over almost a decade of Mitsubishi’s operations in India. Under the section, payment made towards the purchase of goods by Indian buyers from overseas suppliers is subject to withholding tax. The problem, he said, is that when these companies set up shop in India, the tax provisions did not exist and so it was unfair to apply them now.
The Japanese government has also contested that the section violates the India-Japan Tax Treaty. It hopes the tax demands will be rescinded since its companies are in the manufacturing sector, and India wants to expand the sector through bilateral cooperation with many of these companies from Japan. The demand “amounts to a discrimination prohibited under Article 24(3) of the India Japan Tax Treaty to disallow payments for goods purchased by the Indian subsidiaries from a non-resident”. It goes on to add that “such a situation has a significantly adverse impact on their business in India”.
The tax issue will also be flagged in the Japan India chamber of commerce memorandum to be submitted to Jaitley in June. Japan’s ambassador to India, Takeshi Yagi, who has requested for an appointment to meet the finance minister, is also expected to mention the demand.
Indian tax rules are being repeatedly challenged by multi-national companies, of late. Japan joins the list of countries that already have substantially big tax disputes with India.
Speaking at the Indian Express-organised Idea Exchange recently, law minister Ravishankar Prasad said he was against the application of retrospective tax laws except in rare cases, though the government should retain the power to use it. A former revenue secretary said the rise in demands stem from the acute pressure on the tax departments to meet the budget targets for reduction of the revenue deficit set by the government in the past few years.
“Unless the deficit numbers are rationalised, it is difficult to see how these tax demands can be withdrawn,” he said.
(Source: The Financial Express, June 2, 2014)
C: GOVT WANTS BANKS TO FUND LOCAL M&As
NEW DELHI: The finance ministry has begun discussions on allowing banks to fund local buyouts, a proposal that has not found favour with the RBI in the past. If fruitful, the move will be a major boost to domestic acquisitions.
Source said that this time the plan is to let Indian lenders finance domestic acquisitions, mainly for stressed companies that are finding it difficult to meet their loan repayment commitments. The proposal being pushed by the department of financial services in the finance ministry entails making loans available to acquirers based on their balance sheet. So, only financially sound companies will have access to loans, explained a source familiar with the discussions in the ministry. In any case, banks will not fund the entire acquisition costs.
The valuation of the acquisition will be left to the two companies to decide. “Banks will only be associated with making funds available if they think that it’s a good deal from their point of view,” said a source.
For over a decade now, Indian companies can raise funds from domestic banks to finance their overseas acquisitions.
The sources said that informal discussions have taken place between the RBI and the finance ministry but there is no clarity on whether the proposal will find favour with the central bank or not. The RBI is known to play safe and the move proposed by the finance ministry is seen to have several gaps.
Bankers pointed out that funding for domestic buyouts, especially for stressed assets, will only increase the risk for lenders. “It is a way of postponing the risk,” said a banker, adding that the move will only provide a cushion to lenders since the loan will be transferred to a new entity, which will borrow further to acquire the stressed company. Moreover, during periods of low credit off-take, banks will depend on this route to meet their targets, said another banker.
The finance ministry, however, believes that, if approved by the RBI, bank funding for local buyouts will help good companies expand. In addition, a lot of plant and machinery, which is lying idle, can be put to economic use and help revive economic activity.
(Source: The Times of India, June 2, 2014)
D: WITH KEY MEN IN PLACE, NARENDRA MODI PMO GRADUALLY TAKES SHAPE
NEW DELHI: With Prime Minister Narendra Modi firming up the top-level appointments of Nripendra Misra as principal secretary and Ajit Doval as national security advisor (NSA) in his first week, the foundation has been laid for a new-look, all-important, powerwielding Prime Minister’s Office that won’t brook individual ministers undermining the government, something that afflicted the UPA regime. A few more key officials are to be brought in to make the PMO the effective seat of governance under Modi.
One of them is likely to be Andhra Pradesh cadre officer Satish Chandra, who looks set to get the important job of private secretary to the PM. Chandra’s appointment, if ratified, would be significant as he has earlier served as special secretary to N Chandrababu Naidu during his last 25 months as CM of Andhra (2002-04). The 1986 batch officer is now resident commissioner of AP in the Capital after a long stint in the fertiliser ministry.
S Jaishankar, India’s ambassador to the US and a well-regarded Indian Foreign Service officer, is being considered for the role of foreign policy advisor to the PM. With Cabinet Secretary Ajit Seth retiring on June 13, the government will have to decide soon on his successor as well.
Sutanu Behuria, a 1976 batch Himachal Pradesh officer who is currently the secretary in charge of heavy industries, is the senior-most candidate for the job, but others such as Petroleum Secretary Saurabh Chandra and Jawed Usmani are also in the fray. Usmani has just been shunted out by Uttar Pradesh Chief Minister Akhilesh Yadav as the state chief secretary.
With the PM sending out a clear message in the first week that bureaucrats must be free to do their jobs without fear of prosecution, officials are keenly watching to see if the Modi administration goes by seniority while appointing the cabinet secretary — a practice that was abandoned by UPA. The PMO and Cabinet secretariat will need to work in close tandem to deliver the effective governance Modi has pledged.
Officials said one of the biggest problems with UPA-2 was that the Cabinet secretary and the principal secretary to the PM were both from the same batch and cadre (Uttar Pradesh, 1974), with the latter, Pulok Chatterji, having little experience of policy-making in a ministry.
This won’t be the case anymore with Misra replacing Chatterji in PMO. Doval succeeds Shiv Shankar Menon as NSA.
Modi has already roped in two officers from the Gujarat administration in the new PMO as joint secretaries — IAS officer AK Sharma and Indian Forest Service officer Bharat Lal — both from the 1988 batch. Sharma was secretary to Modi in Gandhinagar while Lal was the resident commissioner of Gujarat in the Capital.
The current secretary to the prime minister, R Ramanujam, retires next month, creating another high-level vacancy in the PMO. The tenure of central deputation of some other senior officials from Manmohan Singh’s days in PMO, such as additional secretary to the PM Shatrughna Singh and joint secretary BVR Subrahmanyam, one of the first appointees in the UPA PMO, are scheduled to end in March 2015.
The position of advisor to the PM, created for TKA Nair in the Singh PMO after Chatterji replaced him as the principal secretary, may not be continued in its present form.
Chandra is likely to replace Indian Foreign Service officer Vikram Misri, the current private secretary to the PM, who is expected to move to a senior diplomatic role outside the PMO soon. Another private secretary to Manmohan Singh, Indu Shekhar Chaturvedi, moved to the International Monetary Fund in Washington in April 2014.
On May 29, when Modi took an unprecedented tour of all the offices in PMO, right down to those in which section officers operate, Misri appears to be the one showing him around in the official photograph of the tour.
The same picture clearly shows Modi flanked by the three new officers who arrived at the PMO an hour before he officially joined work last Tuesday — Misra, whose appointment as principal secretary was confirmed after an ordinance was ratified by President Pranab Mukherjee on May 28, Sharma and Lal.
IFS officer Jawed Ashraf and IAS officer Anu Garg are also joint secretaries to the PM. Both were appointed to the PMO jobs in 2012. Ashraf handled external affairs, defence, and the departments of space, atomic energy and overseas Indian affairs in the Singh PMO while Garg was entrusted with human resource development, agriculture, health and family welfare and the PM’s National Council on Nutrition.
The allocation of work in the new PMO is yet to be formalised. The appointment of a communications advisor to the PM, a post that was held by Sanjaya Baru in UPA-1 and Harish Khare and Pankaj Pachauri through UPA’s second innings, is also awaited.
(Source: The Economic Times, June 2, 2014)
E: RBI REMOVES RESTRICTIONS ON FOREIGN EXCHANGE PROPRIETARY TRADES
MUMBAI: A stronger rupee has paved the way for high-street banks to have a greater play in the currency market, with last year’s unnerving choppiness suddenly looking like a thing of the past.
The Reserve Bank of India (RBI) recently told several large lenders that they are free to carry out foreign exchange proprietary trades in which bank treasuries bet on the dollar-rupee movement. The move will deepen the currency market and offer finer foreign exchange rates to customers, particularly large corporates with regular exports, imports and dollar borrowings.
The RBI allows each bank a certain net open position (NOP) limit for prop (or, proprietary) trades; the limit varies from $20 million to $100 million, depending on a bank’s size and level of treasury activity.
In 2013, when the rupee buckled under speculators’ attack, the limits were whittled down by banks to $5 million and even zero at the RBI’s instruction. While there was no formal directive, large banks, particularly multi-national lenders, were verbally told by senior RBI officials to shrink their respective limits as much as possible.
Treasury heads of three banks ET spoke to confirmed that RBI officials have informally communicated that banks can resume trades under respective NOP limits. Thus, if a bank’s NOP limit is $50 million, it can run a maximum net buy or sell position of $50 million.
“There is no formal circular, just as there was no written directive when the limits were brought down last September. It’s in the nature of general advisory…. A few weeks ago, around early May, banks were told that they can use their NOP limits,” said one of the senior bankers.
Last August, a bunch of foreign portfolio managers had hammered the rupee in offshore markets by taking huge positions — running into billions of dollars — in non-deliverable forwards (NDF), and simultaneously selling government of India bonds in India. As the rupee came under pressure from these FII prop traders in debt, a few large companies and banks cut arbitrage deals by cashing in on the difference between the forward dollarrupee rate in India and what was trading in NDF markets of Singapore, Hong Kong and London. “That was when the RBI told us to use NOPs as little as possible,” said a banker.
In August 2013, the rupee had touched a low of 68.95 against the US currency. It was a time when research arms of some international banks were predicting levels well beyond 70. Since then, the situation has changed: after plummeting 13% in 2013, the rupee has climbed a little over 4.5% in 2014 so far. It closed at 59.10 on Friday following a gain of nearly 2% in May.
In the past two months, the risk premium on the rupee has declined so much that many foreign investors are buying Indian debts without covering the currency exposure. In other words, since they do not expect the currency to weaken in the near term, they are not spending extra on currency hedge.
A higher rupee and stability in the forex market have encouraged the government and regulator to consider dismantling some of the restrictions. According to market sources, financial market regulators are planning to allow banks and FIIs to trade in currency futures — a commitment made by the previous government.
Currency dealers believe if FIIs are allowed, the RBI will also have to permit banks to trade in exchange traded futures. (This could be over and above the NOP trades in the regular, over-the-counter foreign exchange market). Last year, with the rupee under pressure, banks were told to stay away from currency futures.
An influential group of foreign investors is lobbying with the government for access to currency futures where trades require no underlier (unlike forward deals in the OTC market). “Many longterm foreign investors like sovereign wealth funds and pension funds are buying GOI bonds. These FIIs are not asking for opening up the currency futures market… Only a small, but vocal, group of prop FII debt traders is insisting that FIIs should have access to currency futures.
These are the same set of investors who had pushed down the rupee last year by their large NDF deals,” said a senior forex dealer. Compared to permitting FIIs and banks in currency futures, restoring NOP limits for banks is not a contentious issue as it simply amounts to withdrawing a restriction that was imposed during a volatile period.
(Source: The Economic Times, June 2, 2014)