Developers in a consortium to be treated as separate tax units

This will enable these companies to set off losses from other projects and not attract the highest income tax rate.

In a major relief to infrastructure developers, the income tax department has clarified that companies which are part of a consortium in large infrastructure projects will be treated as separate taxable units.

This will enable these companies to set off losses from other projects and not attract the highest income tax rate.

In a clarification, the Central Board of Direct Taxes has now allowed the companies to be identified individually rather than as one taxable unit known as ‘association of persons’ or AOP.

Typically, consortiums are formed to implement large infrastructure projects in engineering, procurement and construction (EPC) contracts as well as turnkey projects.

The income tax department considered a consortium to be one separate entity for tax purposes while the companies’ preferred to be treated individually. This led to many tax disputes, which the tax department has now sought to address.

Pointing out that there are differing court verdicts on what constitutes an AOP, the tax department said that with a view to avoiding tax disputes and to have consistency in approach, it has been decided that consortium arrangements may not be treated as AOP, provided that each member of the consortium is independently responsible for implementing its share of work, earns a profit or loss for that work and has its own personnel.

Another criterion is that the control and management of the consortium is not unified.

“Large turnkey infrastructure projects are executed by consortiums of construction companies through EPC contracts. There are certain cases where the tax authorities have taxed all the consortium members as one taxable unit, that is as an AOP. This leads to a number of issues like being taxed at the maximum marginal rate, inability to set off losses of other projects, non-availability of tax credit for non-residents, etc,” said Hemal Zobalia, partner, Deloitte Haskins & Sells Llp, in a note.

“These issues bring in uncertainty and increase the overall tax cost. CBDT has sought to clarify the taxation of such EPC consortiums through this circular,” Zobalia added.

He said that the circular reiterates some of the principles which were already laid down by judicial precedents.

“However, this may not help in resolving all the issues surrounding AOPs as a lot is left to the discretion of the tax officer and the facts and circumstances of each case,” he added.

The move is also expected to attract more foreign investors to invest in infrastructure projects.

Akhil Sambhar, tax partner at EY, called it a positive move from the government.

“It is important for big projects like oil and gas where most of the work is done in a consortium. Any large project, be it power, metro or oil and gas, the magnitude of work is so much that the work needs multiple players. And with no clarity on taxes, it was leading to a large number of tax disputes,” he said.

“With this circular coming in, it will definitely encourage more foreign companies to come to India. In fact, it was a key issue for foreign companies working on EPC projects,” Sambhar added.

Structured equity

Banks will have to lower lending rates in April

Mumbai Irrespective of whether the Reserve Bank of India (RBI) cuts its policy rate on or before the April 5 policy review, banks will have to cut their lending rates by at least 25-30 basis points (bps) in April, to catch up with the lag in transmission.

The central bank has, so far, cut its repo rate by 125 bps and banks have passed on between 60-70 bps of the cut. If the central bank cuts some more, as is expected by the market, banks' lending rate cuts should be steeper, too. One basis point is 0.01 per cent.

But, the lending rate cuts might not happen immediately in March, as banks would ideally want to shore up their treasury profits by taking advantage of the recent dip in bond yields, and also enjoy an improvement in spreads in the last month of the financial year, when credit demand generally picks up.

The resultant profit will also mend their bottom line to some extent, as they have been severely hit by RBI's asset quality review programme, which will continue to exert pressure in the March quarter as well. "Transmission will happen, irrespective of the rate cut quantum (by RBI)," said Soumya Kanti Ghosh, chief economist, State Bank of India.

However, that will likely not be in March, said A Prasanna, chief economist at ICICI Securities Primary Dealership Ltd.

"There is pressure on bank balance sheets now. Transmission will improve with liquidity in April," Prasanna said.

From April 1, RBI's marginal cost-based lending rate (MCLR) would kick in, which will prod banks to use their incremental cost of funds, rather than average cost of deposits to arrive at the lending rate. Since money market rates move faster than deposit rates and banks tap into these money markets, the incremental cost will add dynamism in lending rate calculations. And, 10-year bond yields have fallen 15-20 bps since the Budget. If this trend continues till March-end, banks would have to factor in this drop.

Finally, with RBI infusing longer-term liquidity in the system through secondary bond market purchases, banks should have less reason to complain that system liquidity tightness is not letting them pass on rate cuts. Under the new liquidity framework, RBI ensures call money rates are anchored at around the repo rate, no matter how much liquidity infusion is needed. However, bankers have complained that the liquidity infused is short-term, and more permanent liquidity needs to be infused through secondary market bond purchase. The central bank does so through its open market operations, or OMO. Including a scheduled Rs 15,000-crore OMO purchase on Thursday, RBI's liquidity infusion is close to Rs 50,000 crore in recent months.

The OMOs, and with government spending picking up, have ensured that from an acute shortage of Rs 1.6 lakh crore at the end of January, banking system liquidity has improved to less than Rs 1 lakh crore now.

But there would be stress on the liquidity front again, starting March 15, when advanced tax outflow starts, pointed out Gaurav Kapur, India economist at Royal Bank of Scotland.

The tight liquidity condition would be needed to be evened out first before banks can move with rate cuts and that would be by the next financial year, Kapur said.

However, whether the rate cut would be of any meaning to revive growth is a different question altogether, articulated IDFC Bank's Chief Economist Indranil Pan.

"With MCLR pricing the incremental cost, pass-through of the cumulative 125-basis point rate cut is expected to be at 25-30 bps. So, even after a transmission of 85-90 bps if credit growth doesn't take place, one needs to ask if the problem lies with the RBI rate cuts and transmission mechanism or the credit channel itself," Pan said.

Investment Banking 

Ajay Piramal targets distressed Indian assets

It’s a good time to be in the market, says Anand Piramal

Mumbai: Indian billionaire Ajay Piramal is a man on a shopping mission. His firms are training their sights on distressed assets discarded by indebted businesses and banks struggling with bad loans.

His unlisted real estate unit, recently flush with cash from Warburg Pincus and Co. and Goldman Sachs Group Inc., is looking to buy land parcels from distressed developers, a month after Piramal Enterprises Ltd announced a $893 million fund to buy soured loans. The group’s investment arm is financing builders, who in turn can buy or co-develop projects with their troubled peers.

“My father says we should be like a nimble gorilla so you are able to move quickly, but at the same time you should have the capital to move,” Anand Piramal, the group’s executive director and scion who manages the real estate business, said in an interview in Mumbai. “It’s a good time to be in the market.”

Rich pickings may come through for the Piramal conglomerate as Indian developers’ cash flow from operations fall short of their finance costs and lenders, desperate to recover dues, tighten screws demanding repayment. Saddled with distressed assets at a 14-year high, banks in Asia’s third-largest economy have reported record losses amid pressure from regulators to clean up.

Piramal Realty will “look at good, prime parcels of land with a clean title” from distressed developers and is already in talks for as many as five deals, Piramal said. Disputes over land ownership are common in India, with cases dragging because of litigation for decades.

Sellers are becoming “more amenable now” toward deals to overcome financial stress, which may continue for another year at least, Piramal said. “Capital is always a source of competitive advantage.”

Goldman Sachs acquired a minority stake in the company for $150 million in August, about a month after Warburg Pincus bought into it, pumping in Rs.1,800 crore ($268 million). The company has about 10 million square feet under development in Mumbai and plans to invest 160 billion rupees in the next four years.

Big boys

Builders are selling assets as they streamline operations driven by both strategy and distress, according to Shobhit Agarwal, managing director for capital markets at property broker Jones Lang LaSalle India. “Developers are turning to these big boys because they have both the money and the market trust to make sales plus command a premium,” Agarwal said.

As smaller local builders struggle with byzantine approvals processes, high cost of financing, dwindling sales and drying cash flows, moneyed-up investors such as KKR and Co. and Piramal Realty are swooping in, lured by the prospect of acquiring property at deep discounts from down-and-out developers.

Piramal Fund Management, the family’s real-estate funding vehicle, is distributing as much as Rs.15,000 crore to about 10 developers that are in a position to buy land or collaborate with struggling competitors.

Distress fund

The listed Piramal Enterprises announced setting up aRs.6,000 crore Piramal India Resurgent Fund with the specific mandate of acquiring soured loans, according to a post-earnings presentation in February. Piramal declined to share any details about the new fund or the sectors it’ll focus on.

Shares of Piramal Enterprises, which sells medicines to financial services, have risen 0.8% in the past year, compared with a 16% decline in the S&P BSE Sensex and the 3.9% drop in the 63-member S&P BSE Heathcare index.

The total cash flow from operations for six developers tracked by Moody’s Investors Service, was at Rs.300 crore in the year ended March 2015, dwindling from Rs.3,000 crore in 2011, while total interest costs rose to Rs.3,600 crore fromRs.2,900 crore over this period, the data showed.

Lenders struggling to recover loans that have soured has weighed on credit in the country. Reserve Bank of India governor Raghuram Rajan has set banks a March 2017 deadline to tidy their balance sheets while India’s top court directed the RBI last month to share a list of the country’s largest defaulters in the past five years.

Loans to commercial real estate segment grew 5.9% to Rs.1.7 trillion in 2015, less than half of the 14.8% growth the year earlier, data compiled by RBI show.

“The squeeze is also coming in because of the banks,” Piramal said. “If banks are able to push developers to accept more reasonable valuations, then groups like us can step in. I think it’s happening.” 

Private Equity

Investors can hope for a better 2016

One aspect of fiscal discipline is that the government’s net borrowing programme is lower than last year’s by Rs.15,000 crore, giving more funds for private sector investment

The Budget came in the backdrop of weak global environment, pressure of non-performing assets (NPAs) in the Indian banking system and lower nominal gross domestic product (GDP) growth. Finance minister Arun Jaitley honoured his commitment to fiscal discipline and debt market gave a 20-basis point salute and equity markets gave a 1,500-point salute to the Budget. (One basis point is one-hundredth of a percentage point.)

The commitment to fiscal discipline brings multiple benefits. The Reserve Bank of India (RBI) can now cut interest rates further. Inflationary expectations will remain muted, which will allow lower rates to persist for a longer period of time. Global rating agencies can also upgrade India’s rating if we negotiate well with them.

One aspect of fiscal discipline is that the government’s net borrowing programme is lower than last year’s by Rs.15,000 crore, giving more funds for private sector investment. Foreign institutional investors (FIIs) in both debt and equity markets, having been assured, have turned from being sellers to buyers, and are likely to be this way in calendar year 2016. Between 2003 and 2008, the Sensex multiplied seven times as valuations got re-rated on the back of reduction in fiscal deficit. This cycle can be replayed, albeit on a smaller scale, which would provide support while corporate earnings recover.

The rally in the debt market, despite tight liquidity, has given a mark-to-market gain of Rs.40,000 crore to the banking system. This is much more than the Rs.25,000 crore recapitalisation provided in the Budget. An enabling environment will help banks tackle the issues of NPAs far better than receiving capital from the government.

The Budget has also underestimated the tax revenue growth that may happen due to a pick-up in the economy, higher collection in the income disclosure scheme or if the fast track dispute settlement mechanism takes off. Non-tax receipts’ estimate, however, looks challenging, especially the ones related to spectrum receipts and divestment. We have never achieved divestment targets in the past, including during a bull market.

To be able to achieve its divestment targets, the government must explore the strategic divestment route. The Budget has provided for asset sales by public sector units, which could be a game changer. Many foreign companies are not interested in setting up projects in India but would be keen on buying existing or running projects. In these times of negative interest rates in most parts of the world, the government can easily raise more than its divestment target by selling a few running power or road assets.

To adhere to fiscal discipline, the Budget has also proposed some steps to improve productivity of government spending. If executed well, such steps can make a materially positive impact on growth.

One such step is the proposed statutory backing to use Aadhaar card. While it’s not mandatory to have Aadhaar to avail government benefits, including subsidies, with statutory backing for it, direct cash transfer regime can be introduced for subsidy payment. This can help India get rid of many of its legacy issues.

The finance minister also spoke of an electronic platform for centralising procurement. A transparent mechanism like this can lower the cost of procurement by a big margin.

There was also a proposal to have a transaction tax on cash transactions above certain values, which will help integrate the parallel economy.

Apart from fiscal discipline, there was also a big push to increase government investment in road and rail infrastructure by allocating around Rs.2.18 trillion in this direction. If entrepreneurs can be supported with ease of doing business, better liquidity and lower interest rates, private investment can revive and work along with the government’s thrust on road and railway sectors.

The rural sector is another area that is under stress due to two successive below-average monsoons. The Budget has rightly allocated a significant amount of money for completion of last-mile funding of 23 major irrigation works and shifting focus on water conservancy through the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). The rural economy can give a boost to the overall economy as monsoon this year is expected to be good courtesy La Niña. This will in turn generate a self-fuelling growth momentum and create an income multiplier effect, not only in the rural sector but also for the mainline economy.

With declining interest rates, possible passage of key reform bills such as bankruptcy code (and also Goods and Services Tax), and a strong infrastructure push, one can expect good times ahead.

So, which asset classes are likely to benefit from this? Both debt and equity will do better in 2016 than they did in 2015. Investors are recommended to consider duration funds like gilt and bond funds on the back of potential rate cuts as well as credit accrual funds, despite the recent downgrades in the debt segment. Large-cap and multi-cap funds in the equity segment should do well in 2016. While stock picking will continue to give an edge, non-leveraged construction sector, consumer durables, select consumer staples, automobiles, non-banking financial companies (NBFCs) and private sector banks should do well. Rural economy related sectors will provide a superior outperformance based on a good monsoon.

While a lump sum investment is fine for debt funds, systematic investments may work better for equity funds.

In Mahabharata, it is mentioned that sometimes one good thing of a person covers 99 bad things. This Budget has many good things but the one on fiscal prudence has the capacity to cover all the pains of the global as well the domestic economy. This will then usher in achhe din for investors in debt as well as equity markets.

Investment Banking, Debt Syndication

Tata Motors ties up with Bharat Forge, General Dynamics for Rs 50,000 crore infantry combat vehicle project

NEW DELHI: The home-grown auto major Tata Motors today announced a tri-partite partnership with Bharat Forge and US-based General Dynamics Land Systems (GDLS) to bid for India's Rs 50,000-crore future infantry combat vehicle (FICV) project.

Tata Motors will lead the consortium with Bharat Forge as a partner while General Dynamics Land Systems (GDLS) will bring in its much-proven expertise in-combat vehicle platforms, the company said in a statement.

On the partnership, Tata Motors Executive Director, Commercial Vehicle, Ravi Pisharody said: "Through this partnership, we will be better-positioned to help the country realise its 'Make in India' vision, for the first completely indigenised combat vehicle and at the same time cater to the opportunities available right here in India."

Bharat Forge Chairman and MD Baba N Kalyani said: "Our proposed partnership will constitute an important milestone to help meet the Indian government's objectives to strengthen indigenous defence capabilities, and particularly in land systems, with FICV."

GDLS Vice-President (Tracked Combat Vehicles) Donald Kotchman said the partnership will help meet the requirements of the Ministry of Defence FICV programme.

"At General Dynamics Land Systems, we have established a track record of delivering and sustaining international programmes, in a timely and cost-effective manner throughout the platform's life," he added.

The Tata Motors-led consortium's response to the Ministry of Defence EoI (Expression of Interest) commits to indigenise through various Tata Group companies that play a vital role in the defence and aerospace sector, the company said, adding that it will also partner with firms with the most advanced competencies in development of ICVs, for the global market.

In January this year, Tata Motors had said it would discuss with the government to include consolidated revenues in determining eligibility to bid for the FICV project despite being "confident" of its domestic turnover meeting the financial criteria.

The company is among the 10 reported Indian firms in race for building FICV - a tracked, armoured vehicle that will protect infantrymen riding into battle.

Reports had suggested that Tata Motors may not qualify for the tender if its London subsidiary JLR's is not considered.

The Rs 50,000-crore FICV project is spread over 25 years and other Indian firms, including L&T and Mahindra, are in the fray for the project. Other firms reported to be in the running include L&T, M&M, Bharat Forge, Pipavav Defence, Punj Lloyd and the Ordnance Factory Board.

The Army needs an amphibious FICV that is air-portable and can fire anti-tank guided missiles that destroy tanks at ranges of 4,000 metres.L The home-grown auto major Tata Motors today announced a tri-partite partnership with Bharat Forge and US-based General Dynamics Land Systems (GDLS) to bid for India's Rs 50,000-crore future infantry combat vehicle (FICV) project.

Tata Motors will lead the consortium with Bharat Forge as a partner while General Dynamics Land Systems (GDLS) will bring in its much-proven expertise in-combat vehicle platforms, the company said in a statement.

On the partnership, Tata Motors Executive Director, Commercial Vehicle, Ravi Pisharody said: "Through this partnership, we will be better-positioned to help the country realise its 'Make in India' vision, for the first completely indigenised combat vehicle and at the same time cater to the opportunities available right here in India."

Bharat Forge Chairman and MD Baba N Kalyani said: "Our proposed partnership will constitute an important milestone to help meet the Indian government's objectives to strengthen indigenous defence capabilities, and particularly in land systems, with FICV."

GDLS Vice-President (Tracked Combat Vehicles) Donald Kotchman said the partnership will help meet the requirements of the Ministry of Defence FICV programme.

"At General Dynamics Land Systems, we have established a track record of delivering and sustaining international programmes, in a timely and cost-effective manner throughout the platform's life," he added.

The Tata Motors-led consortium's response to the Ministry of Defence EoI (Expression of Interest) commits to indigenise through various Tata Group companies that play a vital role in the defence and aerospace sector, the company said, adding that it will also partner with firms with the most advanced competencies in development of ICVs, for the global market.

In January this year, Tata Motors had said it would discuss with the government to include consolidated revenues in determining eligibility to bid for the FICV project despite being "confident" of its domestic turnover meeting the financial criteria.

The company is among the 10 reported Indian firms in race for building FICV - a tracked, armoured vehicle that will protect infantrymen riding into battle.

Reports had suggested that Tata Motors may not qualify for the tender if its London subsidiary JLR's is not considered.

The Rs 50,000-crore FICV project is spread over 25 years and other Indian firms, including L&T and Mahindra, are in the fray for the project. Other firms reported to be in the running include L&T, M&M, Bharat Forge, Pipavav Defence, Punj Lloyd and the Ordnance Factory Board.

The Army needs an amphibious FICV that is air-portable and can fire anti-tank guided missiles that destroy tanks at ranges of 4,000 metres.

International Fund Raising 

36 Websites That Will Save Your Startup Time and Money

Here is a list of some of the best sites to know. They range from project management to motivation to e-commerce.

If you're in the process of launching a startup, you'll be happy to know the internet offers you a wealth of resources that will make your job as an entrepreneur much easier. One of the best ways to boost your productivity and chances of success is to bookmark and review sites that will help you excel as a business owner.

Here is a list of some of the best sites to know. They range from project management to motivation to e-commerce. The sites are in no particular order.

1. Ideator

So you've got a great idea that you'd like to turn into a business? Start with Ideator. It's a platform specifically designed for entrepreneurs like you who want to bring their million-dollar visions to life.

2. Tony Robbins

If you want to succeed as a business owner, you're going to have to unlock your potential. To do that, learn from the best: Tony Robbins. No better person to follow and learn from as you grow.

3. Ecwid

If you'd like to create an e-commerce site in just five minutes, stop by Ecwid.com. Currently, more than 900,000 sellers from around the world use Ecwid to sell products.

4. QuickSprout

As the name implies, QuickSprout is all about growth. It is quite possibly the best site on the internet for learning about digital marketing.

5. LinkedIn

If you want to be successful in business, you're going to have to forge alliances and create professional relationships with other people. There's no better online site for business networking than LinkedIn.

6. Healthcare.gov

You're going to need health insurance after you quit your job and launch your own business. Also, if you have employees, they'll need health insurance as well. Be sure to visit Healthcare.gov for your coverage options.

7. Inc.

You are on Inc.com now, so you know its great. But you can never learn too much about being an entrepreneur. There's always something more to know about the latest in marketing, financing options, management, and professional development. That's why you should bookmark Inc.

8 & 9. HipDial & Google + Hangouts 

To succeed in your entrepreneurial efforts, you'll almost certainly need to schedule group conference calls on occasion. For that, you should use HipDial. It is so simple and easy, which is why startups love it. An alternative option that incorporates video conferencing is Google + Hangouts. 

10. SBA

Uncle Sam has an organization that exists to help entrepreneurs just like you. It's called the Small Business Administration (SBA). The SBA's website is packed with helpful resources.

11. Due

If you want to streamline your invoicing and time tracking processes, you can't go wrong with Due.

12. WordPress

To create a successful online presence, you'll need a blog. Simply put, there is no better blog platform on the market than WordPress. But do not use Wordpress.com; instead, install the Wordpress content management system on your site.

13. TradeAway

If you're bootstrapping your way to success with limited resources, you might be able to get some professional assistance from somebody else who will ask for your assistance in return. Check out TradeAway for a place to barter your services in exchange for somebody else's.

14. Square

It's tough to make it in business these days if you don't take credit cards. Square gives you the opportunity to swipe cards from virtually anywhere.

15. Kayak

You're likely going to be doing some traveling as an entrepreneur. If you want to find the best flight and hotel deals, check out Kayak.

16. FreshBooks

Once upon a time, QuickBooks was the only "go to" solution for accounting. Nowadays, some entrepreneurs are flocking to the cloud-based solution offered byFreshBooks. Both are great solutions. Take your pick. 

17. BaseCamp

If your team is widely distributed across the continent, or even the world, you'll need an online hangout where you all can communicate, collaborate, and coordinate. For that, use BaseCamp.

18 & 19. Dropbox & Google Drive

If you're looking for a cloud-based solution for file storage, Dropbox and Google Driveare your two best bets. Both are free until you hit a certain limit.

20. LanguageTranslation

It's a global economy. You might want to translate your website into another language (in fact, I recommend it). For document translation services, enlist the aid of a company like LanguageTranslation.com.

21. StartupGrind

StartupGrind is a website where you can rub shoulders with like-minded business owners. There are over 400,000 active members in 85 countries. 

22. forEntrepreneurs

The name "forEntrepreneurs" is fairly descriptive. It's a blog run by David Skok, a five-time entrepreneur turned venture capitalist. It's a great site to visit from time to time for sage business advice.

23. A Smart Bear

A Smart Bear is a blog run by Jason Cohen, who offers advice for entrepreneurs. As of this writing, more than 40,000 people subscribe to Cohen's lessons.

24. Rocket Lawyer

You are going to have legal issues. For that, use Rocket Lawyer. I've used this on more than one occasion and saved thousands of dollars.

25. The Startups Subreddit

You might think of Reddit as a great place to check out funny cat photos or participate in an "Ask Me Anything" exchange with a famous celebrity. It's also a great place for gleaning information. Specifically, check out the Startups subreddit.

26. Copyblogger

Content marketing is an important part of online marketing. To that end, make sure you visit Copyblogger regularly.

27. CrunchBase

For practical purposes, everything you need to know about startup funding can be found at CrunchBase.

28 & 29. Search Engine Roundtable and Search Engine Land

If you want to keep up with the latest buzz about SEO best-practices, bookmarkSearch Engine Roundtable and Search Engine Land.

30 & 31. Upwork and Elance

If you're running a solo shop and you need some affordable, temporary help for your startup, be sure to visit Upwork and Elance. You'll find plenty of contractors who are more than happy to work with you at rock-bottom rates.

32. Fiverr.com

Another great site for finding affordable contract work for a variety of purposes (spanning everything from SEO to logo design) is Fiverr. As the name implies, prices for service start at just $5.

33. 99 Designs

If you're not an artist but are in desperate need of quality design work, visit 99 Designs. It is pretty unique the way it works. You actually launch a contest and then choose the winner, giving lots of options.

34. Marc & Angel Hack Life

As an entrepreneur, you'll always be in need of some great self-help tips. For some of the best life hacks, be sure to bookmark and regularly browse Marc & Angel Hack Life.

35. Moz Local

Moz Local is an especially great site to visit if you're a brick-and-mortar business that's in need of local SEO.

36. Ignite Visibility University

Another great library packed with information that will help you excel as a startup in the digital marketing area is Ignite Visibility University.

Sun Capital 

India says will ensure that banks are well-capitalised

India has "good control" over stressed loans at state-owned banks and will ensure lenders are well-capitalised, junior finance minister Jayant Sinha said on Friday.

Speaking as senior officials from the banks, the Reserve Bank of India and the finance ministry held an annual meeting, Sinha said the government would allocate capital based on the banks' capital-adequacy ratios, performance and credit growth.

"We will provide more as necessary to ensure that our banks are well-capitalised," he told reporters.

"As far as the set of stressed assets is concerned, as far as the NPA (non-performing assets) situation is concerned, that we think we now have very good control over and of course (we are) working very closely with the RBI."

Some critics accused the government of skimping on a bailout for the ailing state banks after Finance Minister Arun Jaitley did not announce additional funding in his Feb. 29 budget.

He stuck to plans to provide state banks with 250 billion rupees ($3.7 billion) of new capital in the next financial year towards a sector-wide bailout that the government estimates will cost $26 billion over four years.

Stressed loans -- those that have already turned bad and those seen at risk of doing so -- amount to 8 trillion Indian rupees ($119 billion), or 11.25 percent of total loans, Sinha said on Friday.

A recent surge in bad loans at state-run lenders after their regulator ordered a clean-up has led rating agencies to suggest banks will need more capital support from the government to cover losses and meet Basel III global banking rules.

More than two-dozen state-run lenders account for over two-thirds of India's banking assets and some 85 percent of troubled loans in the financial sector.

($1 = 67.0630 rupees)

Sun Capital

Banks now have room to raise funds via tier 2 bonds: RBI

With the Reserve Bank of India (RBI) tweaking of banks’ core capital to include a part of real estate assets and foreign exchange, lenders will now have additional headroom to raise funds through tier 2 bonds, RBI deputy governor R Gandhi said on Thursday.

He told reporters on the sidelines of Gyan Sangam, a brainstorming session with financial sector players convened by the finance ministry, that Rs 25,000 crore of capital allocated for public sector banks in FY17 should be enough. “Banks can also go to the markets next year, so we believe it will be enough,” he said

On asset quality review, Gandhi said it is unlikely bad loans will spill over from FY16 to the next fiscal. “Spillover of bad loans unlikely in FY17 after the asset quality review,” he said. State-owned banks have been under severe stress arising out of delinquency in loans mostly belonging to infrastructure, power and steel sectors. As of September 2015, the stressed asset ratio — a combination of bad loans and recast assets — of public sector banks stood at 14.1%, versus 4.6% in private sector banks.

As per the RBI’s latest move, which is in sync with the Basel III capital norms, banks can account for 45% of their revalued real estate assets as tier 1 capital subject to riders.

The revised regulations on tier 1 capital include treating revaluation reserves, subject to conditions, as Common Equity Tier 1 (CET1) capital at a discount of 55%, instead of as tier 2 capital; treating foreign currency translation reserves, subject to conditions, as CET1 capital at a discount of 25%; and several directives on how to treat deferred tax assets vis-à-vis CET1 capital. These changes could improve the capital adequacy ratio of major PSBs by up to 100 basis points.

According to estimates, these relaxations, particularly that of treating revaluation reserves as CET1 capital, given the huge amounts of physical assets PSBs are sitting on, will free up capital upwards of Rs 30,000 crore-35,000 crore for them and upwards of Rs 5,000 crore for private sector banks.

Hinting that the RBI is looking at all such possible measures to augment the existing capital of banks, which would reduce the burden on them to raise fresh capital to a certain extent, governor Raghuram Rajan had hinted that the RBI is trying to identify non-recognisable capital, such as undervalued assets, already on bank balance sheets and could allow some of these to count as capital under Basel norms, provided a bank meets minimum common equity standards.

Sun Capital