Infrastructure companies planning to mop up funds through Infrastructure Investment Trusts (InvITs)

IRB Infrastructure Developers is planning to raise ₹5,000-6,000 crore, expected to file the DRHP within a month. IRB intends to use the proceeds mainly to fund new road projects it intends to bid for and also for existing ones. The company would also be bringing its six NHAI toll road projects, valued at ₹7,000-8,000 crore, into the trust. The company has mandated Deutsche Bank, Credit Suisse and IDFC Bank as merchant bankers for InvITs, sources close to the development told BusinessLine.

Other players are in the queue

Companies such as Adani Group, GMR Infrastructure, IL&FS Transportation Networks and L&T are also understood to be looking at InvITs to raise funds. Sterlite Power Transmission, a company that was demerged from Sterlite Technologies, is also planning to file the DRHP for InvITs by September. SPTL had filed an application for InvITs with SEBI in June. According to the sources, it was planning to raise ₹2,500-3,000 crore.

About InvIT

IRB fund raising could be the first fund-raising through an InvIT after it was first proposed in the Union Budget in 2014. In this year’s Budget speech, Finance Minister had proposed that any distribution made out of income of a SPV to InvITs having specified shareholding will not be subjected to dividend distribution tax, giving a much-needed fillip to the trust.

InvITs, much like mutual funds, enable individuals to pool investments into the infrastructure sector and earn a return on the income (after deducting expenditure). InvITs can invest in infrastructure projects, either directly or through SPVs, while in case of public-private partnership projects, such investments can be made only through SPVs.In India, InvITs are regulated by SEBI and are mandated to be listed.

Source: http://buff.ly/2b5YU1r

GST has benefits for infrastructure

There are both positive and negative impacts of the tax, but the net result for the sector is advantageous

This is GST ( goods and services tax) season; and as the dust settles on the commencement of the long journey to implement the historic GST regime, it is worthwhile to take stock of how it impacts specific aspects of Indian infrastructure. Here are seven ways GST affects the sector — three positive, and four negative.

Electricity ( impact: negative): GST is expected to inflate electricity costs by up to eight per cent as the government has decided to keep electricity out of the ambit of this new tax dispensation. Power producing companies — both renewable and conventional — would have to pay GST for their inputs such as fuel and machinery but will not be able to get these taxes refunded, given that their output — electricity — is exempt. This higher cost of producing electricity will then be passed on to consumers under the “ change of law” clause in power purchase agreements ( PPA). Developers selling electricity in the spot market or on a non- PPA basis would have to factor in the higher cost.

Works contracts and EPC ( impact: positive): GST seeks to provide muchneeded clarity on works contracts, and therefore, on the engineering, procurement and construction ( EPC) business line. Works contracts are proposed to be taxed as “ services”. This means the GST rate and provisions, like place of supply rules et al, as applicable on services will apply to works contracts. The major gain from this treatment is that the tax would be now charged on the actual contractual base. Also, local versus inter- state works contracts, that at present leads to innumerable disputes, should get eliminated. Hence, EPC contract prices should come down somewhat on account of this new tax- efficient structure, which in turn should benefit project owners.

Cement ( impact: positive): Cement is acrucial input to the infra sector, and GST is expected to impact it positively. The overall indirect tax incidence is currently estimated to be around 25 per cent. The cement industry is also expected to benefit from lower costs of logistics. Overall, a decrease in cement prices is expected.

Logistics ( impact: positive): The GST is expected to enable a reduction in logistics cost by as much as 20 per cent to 30 per cent, as firms reconfigure their supply chains on four counts. First, as India becomes one big market, there will be larger but fewer warehouses. Second, it will lead to a larger number of bigger trucks on roads as there is greater adoption of the hub- and- spoke model. Third, these changes will lead to greater economies of scale for transport operators and lead to more companies outsourcing their logistics operations. Four, reduction in waiting and idling time at inter- state barriers and checkpoints is expected to provide a huge relief.

Advisory, consulting, engineering and project management services (impact: negative): As with all other services, firms providing these services to the infrastructure sector will have a negative impact due to the higher incidence of GST at 17 to 18 per cent vis- à- vis the current 15 per cent.

Abolition of tax holidays and exemptions (impact: negative): There are different tax holidays and exemptions for infrastructure development and operations at both the central and state levels. Whilst there is the hope that in the final analysis, these tax holidays and exemptions will be allowed to run their course, the lurking fear is that they will be removed.

Civil aviation ( impact: negative): Five petroleum products — crude, natural gas, aviation turbine fuel ( ATF), diesel and petrol — are excluded from the coverage of GST for the initial years while the remaining petroleum products —kerosene, naptha and liquefied petroleum gas ( LPG) — are covered. Flight tickets are likely to get costlier as airlines will not be able to claim credit on tax paid on jet fuel. The current service tax ranges from 5.6 per cent to nine per cent of the base fare, which is considerably less than the GST rate that is being spoken about, of 15 to 18 per cent. Currently, airlines can claim what is called a cenvat credit on the central excise duty for fuel. They stand to lose this in the GST regime as ATF is outside the purview of GST.

While there is this bundle of negatives and positives, this columnist is of the opinion that on the whole, GST has a positive impact on the sector. Increase in prices of airline tickets and electricity are soon absorbed and forgotten.

But the positives that emanate from rationalisation of taxes on works contracts, reduction in cement prices, the huge benefit to logistics and the elimination of a raft of complex exemptions and tax holidays has clear long- term advantages.

Cash-starved developers tie up with bigger rivals to fund projects

Large firms step in as development managers for smaller developers in return for a share of revenue and profits.

Aproposed, luxury residential project on south Mumbai’s Hughes Road is finally ready to take off after eight years of waiting for approvals, but developer Rohan Lifescapes is not in a position to execute it.

The 150,000 sq. ft project of Rohan Lifescapes, which at one point had tied up with Trump Organization USA Llc to build a Trump Tower, has now been taken up by Radius Developers. Radius and Rohan Lifescapes have entered into a revenue-sharing partnership, where the former will develop the project.

This is the second project on Hughes Road, where the average property price is Rs.50,000 per sq. ft, which Radius has taken over. The first was another stalled venture by Hubtown Ltd.

Over the past year or so, Rohan Lifescapes, which has 10 ongoing projects spread across south and central Mumbai, has also sold a two-acre land parcel in Worli that it was to develop, and has formed an equal partnership with another firm for a property on Hughes Road.

“The real estate industry is going through a change, and going forward, there will only be a few developers with roles divided amongst them. There will be the ones who can clear the land, get the permissions and then there will be those who have the financial strength and development expertise to execute those,” said Rohan Lifescapes’ chairman Harresh Mehta.

The real estate sector in India, which has witnessed its longest, harshest slowdown that has lasted for more than two years now, is undergoing fundamental changes, property analysts say.

There are around 11,500 real estate firms registered with industry body Confederation of Real Estate Developers Association of India (Credai-National) and there would easily be a few thousand local developers across property markets who aren’t registered.

The sluggish market has led to a goldmine of opportunities for larger developers who are bailing out developers stuck with projects.

“There are way too many developers in the country and that will change,” said Anuj Puri, chairman and country head at property advisory JLL. “There are clear signs of consolidation in the sector where weaker developers, who can’t sell their own projects any more or don’t have the financial strength, are selling their projects or tying up with better, larger developers.”

As sales remained tepid and cash flows uncertain, a number of real estate firms have fallen into a potential debt trap and are borrowing heavily. Developers who banked heavily on valuable land parcels in Mumbai and the National Capital Region (NCR) suddenly found themselves stuck with expensive assets that they didn’t have the ability to develop.

Orbit Corp. Ltd, which at one point of time owned some of the best-located projects in south Mumbai, is now arranging capital to relaunch at least five of them, and looking to strike a partnership with other developers for its large proposed project in Alibaug and another one in Mumbai.

“There is not one project that has been delivered on time in Mumbai, leaving buyers sceptical on making a decision to buy a home,” said Orbit Corp. managing director Pujit Aggarwal.

With the Real Estate (Regulation and Development) Bill, 2013, approved by the Rajya Sabha last week and then by the Lok Sabha on Tuesday, the stage is set for some big reforms in the sector. The real estate bill takes a hard look at the developer community, particularly the ‘fly-by-night’ operators, and demands unprecedented regulation in the sector in the form of financial discipline, transparency and credibility. “The real estate bill asks for financial closures on projects and other reforms that will eventually make it tough for all kinds of developers to survive,” Puri said.

What earlier seemed to be ‘distressed sales’ by specific developers who wanted to monetize their assets, is now becoming a business strategy for many, who know that they can’t survive on their own in the current challenging market conditions.

This has paved the way for new forms of partnership models: development management, joint development and joint ventures to name a few.

Developers such as Godrej Properties Ltd and Tata Housing Development Co. Ltd have tied up with multiple developers in different markets, allowing them to enter into new property markets without buying any land.

In January, Godrej Properties signed a development management agreement with Lotus Greens to build a housing project in Sector 150 of Noida, marking the former’s entry into the Noida market. It has also entered into a joint development agreement with Vihang Group to develop 15 acres of land off Ghodbunder Road in Thane.

Pirojsha Godrej, managing director and chief executive of Godrej Properties, in an interview on 8 February said that it’s not necessarily distressed developers that approach the company. Companies that want help in monetizing their projects faster, with greater value than they can do independently, are also seeking partnerships.

“We are pursuing dozens of such opportunities and at any given point in time, we are discussing with a number of developers,” Godrej said.

Large real estate firms have stepped in as development managers for smaller developers and landowners, in return for a share of the revenue, share in profits or a management fee.

Radius Developers, headed by Sanjay Chhabria, has made multiple acquisitions and struck joint ventures in the past year and a half, partnering with firms such as DB Realty Ltd and Sumer Group in Mumbai.

REAL ESTATEBUILDERSREALTYGODREJ PROPERTIESDEVELOPERS

Real estate regulator now a reality

The bill aims to empower home buyers and make developers accountable.

The upper house of the parliament on Thursday passed the long-pending Real Estate (Regulation and Development) Bill 2015, paving the way for setting up of regulatory bodies to monitor projects and bring transparency and accountability in real estate transactions.

The bill aims to empower home buyers, make developers accountable toward their promises and put in place mechanism to check malpractices in the sector. The law is of immense value to home buyers who have long suffered with builders changing project plans without the consent of buyers or diverting funds from one project to another. 

 “This is a major reform that promises to bring in much-needed transparency and accountability to the rather opaque sector. It will create a much-needed consumer right protection umbrella for buyers of real estate, thereby increasing consumer confidence as well as creating lasting developer brands strong on quality and timely delivery of their projects,” said Anuj Puri, chairman and country head, JLL India.

The bill’s chief objective is to set up regulatory authority on the lines of other sectors like banking and telecom and also form appellate tribunals in states and union territories. The authority will appoint abjudicating officers to settle disputes, which will be taken up by the appellate tribunal. 

The regulator will work as a nodal agency and co-ordinate efforts regarding development of the sector with key stakeholder and the government.

Among other key features, all projects including commercial and residential starting from 500 square metres or eight apartments are to be registered with the regulator, against the earlier mandate of 1,000 square metres or 12 apartments. It will be applicable retrospectively across ongoing projects too. 

However, in a discussion on the bill in the parliament, Union Urban Development Minister Venkaiah Naidu said clarity is yet to emerge if the current framework will be applicable on ongoing projects as well. He also said state governments have the flexibility to lower the project size threshold for mandatory registration. 

All real estate agents who intend to sell plot, apartment or building also have to register with the regulator. with the regulator.

With a view to promote timely completion of projects, the bill makes it compulsory for developers to keep at least 70 per cent of customer advance, including land cost in a separate escrow account, to meet construction costs. This is up from the previous requirement of 50 per cent.  

The government has also brought in parity on interest payment in case of default. Now, builders will have to pay same interest as home buyers in case of default or delays—earlier home buyers were accountable for this. It has also increased the liability of builders from two years to five years in case of structural defects.  

In case of violation of orders of the appellate tribunal, builders will be charged with three years of imprisonment while agents and buyers will have to face one year of imprisonment or monetary penalty or both. It also advocates that disputes should be resolved within 60 days.

Impact
Anshuman Magazine, chairman and managing director, CBRE South Asia Pvt Ltd, said it will have a far reaching implication for the real estate and construction sector. “It will help regulate the sector and promote transparency. If implemented in the right spirit, it could facilitate greater volumes of domestic as well as overseas investment flows into the sector. Home buyer confidence in the property market is also likely to revive.” 

Experts believe that this will go a long way in reviving the confidence of home buyers. Sales in housing market has softened over the years as end users and investors have stayed away due to high prices and unchecked construction delays in the sector. This has taken the unsold stock to an alarming level with some cities sitting on a huge pile-up of inventory.

The bill aims to boost the confidence of home buyers with more transparency and accountability from the developers.

JC Sharma, vice chairman and managing director at Sobha Ltd, said this is a step in the right direction. But he added that the bill made no mention of time-bound approvals by various central, state and local agencies, which is critical to the sector’s growth.

It is expected that developers will also benefit once the law is implemented as they can access cheaper and wider source of financing. However, on the other side, it will also gradually weed out a lot of fly-by-night and non-serious players from the market. 

Sun Capital 

Reforms in India will be slow, tedious: Morgan Stanley

Experts said domestic woes, including ballooning NPAs reported by banks and weak quarterly numbers in various other sectors, also added to the market weakness recently.

Big bang reforms will not be the operating template for India and the process will be a 'slow and tedious one', says a Morgan Stanley report.

The global financial services major said that the recently announced Budget for 2016-17 has proved once again that major reform initiatives will not be the operating template for the country.

"Reforms in India will be a slow and tedious process, requiring the buy-in of the opposition and the bureaucracy," it said. Since the beginning of this year, Indian markets have seen heavy volatility largely owing to high fluctuations in global markets led by the Shanghai Composite and domestic events such as the Union Budget, it said.

The Indian equity markets have seen extreme weakness due to various negative factors, including global economic slowdown fears, falling crude prices, worries related to Chinese economy and muted quarterly earnings.

Experts said domestic woes, including ballooning NPAs reported by banks and weak quarterly numbers in various other sectors, also added to the market weakness recently. Meanwhile, the index slumped to its lowest level in 21 months, when the Sensex crashed 807 points to drop below the 23,000-mark on February 11, this year.

"Moreover, what was evident once again this year, is that while India may be in a relatively better position based on external macro indicators compared to 2013, the correlations with global markets always rise disproportionately during periods of heightened uncertainty in other parts of the world," the report added.

Sun Capital

Banks disburse over Rs 1.15 lakh crore under PM Mudra Yojana

Banks have so far disbursed over Rs 1.15 lakh crore under Pradhan Mantri Mudra Yojana (PMMY), financial services secretary Anjuly Chib Duggal said on Tuesday.

Micro Units Development and Refinance Agency Ltd (Mudra) focuses on 5.75 crore self-employed who use funds totalling Rs 11 lakh crore and provide jobs to 12 crore people.

Under PMMY, loans between Rs 50,000 and Rs 10 lakh are provided to small entrepreneurs.

"We have been working with Mudra. It has been a runaway success ... we are looking at Rs 1.15 lakh crore plus right now," she said at an event organized by MFIN here.

The scheme was launched by Prime Minister Narendra Modi in April last year.

Three products available under the PMMY are Shishu, Kishor and Tarun, to signify the stage of growth and funding needs of the beneficiary micro unit or entrepreneur.

Shishu covers loans of up to Rs 50,000 while Kishor covers those above Rs 50,000 and up to Rs 5 lakh. Tarun category provides loans of above Rs 5 lakh and up to Rs 10 lakh.

With regard to Banks Board Bureau, Duggal said, she would be meeting newly appointed chairman Vinod Rai this week to discuss operationalisation of this specialised body.

Last month Rai, a former CAG, was appointed head of Banks Board Bureau by Prime Minister Narendra Modi.

The bureau will give recommendations on appointment of directors in public sector banks and advise on ways to raise funds and mergers and acquisitions to the lenders.

There are 22 state-owned banks in India including SBI, IDBI Bank and Bhartiya Mahila Bank.

Besides, she said that there would be meeting of heads of the bank on March 22 to discuss about the recently launched crop insurance scheme by Prime Minister.

The crop insurance scheme scheme has already been approved by the Cabinet that would replace the existing ones to ensure that farmers pay less premium and get early claims for the full sum insured.

Investment Banking

Indiabulls Group to invest Rs 25,000 crore in Haryana over seven years

MUMBAI: Mortgage lender Indiabulls Housing Finance and its group company, Indiabulls Real Estate will invest Rs 25,000 crore in Haryana over the next seven years. The group has entered into a Memorandum of Understanding with the government of Haryana for the same, the company said in a statement.


Indiabulls Group, whose founder, Sameer Gehlaut has origins in Haryana, is headquartered in Gurgaon, and has pan India operations with offices in 200 locations across the country.

The pact was inked during the "Happening Haryana Global Investors Summit" wherein Indiabulls Groups has made an in-principle commitment to invest Rs 25,000 crore during the said period.

The investment will be made through direct lending for home loans as well as indirect lending to the developers of various projects, particularly in the affordable housing segment.

The group already has exposure in NCR, both as a lender as well as a developer and is aiming to scale it up by tapping into the growing demand for affordable housing in the backdrop of "Housing for all by 2022".

Sun Capital

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 

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

Jewellery sector contributes to black money: CBEC chief

Despite the ongoing jewellers' strike to protest against reimposition of 1 percent excise duty on gold and diamond jewellery, CBEC today said the sector contributes to generation of black money and needs to be brought under the tax ambit.

"We have brought jewellery (sector) into the tax net. This is the levy which we had attempted two years ago and withdrawn... This is the sector which you will agree with me needs to be brought into tax needs," Chairman of the Central Board of Excise and Customs (CBEC), Najib Shah today said at an event organised by industry body Assocham.

"This is a sector which lends itself to generation of unaccounted wealth." Finance Minister Arun Jaitley in the Budget for 2016-17 had proposed 1 percent excise duty on jewellery without input credit or 12.5 percent with input tax credit on jewellery excluding silver other than studded with diamonds and some other precious stones.

Jewellers are on a three-day pan-India strike to protest against the proposed re-introduction of 1 percent excise duty on gold and diamond jewellery and mandatory quoting of PAN by consumers for transaction of Rs 2 lakh and above.

Shah noted: "... manufacturing sector contributes 17 percent of GDP. We have a huge chunk of industry which is out of the tax net." The CBEC chairman said the revenue department will take a hit of Rs 1,000 crore due to the change in CENVAT credit rules.

"But we thought it is essential because the cost of litigation for you and me are much more than revenue which otherwise we have got," he said.

Noting that the government has increased some duties, Shah said it's done so to create a level-playing field for Indian industries as was the case in defence.

He urged industries to stop demanding exemptions to avail of goods and services tax (GST).

"If you want GST, you should not demand exemptions because two don't go together," Shah said.

 

Sun Capital

Dilip Buildcon bags Rs 545.4-cr contract in Goa

MUMBAI: Engineering firm Dilip Buildcon today said it has bagged Rs 545.4-crore contract from the Ministry of Road Transport and Highways to construct 640-km eight-lane cable-stayed bridge across the Zuari in Goa. 


The Bhopal-based company has partnered with Ukrainian firm Mostobudivelnyi Zahin (MBZ) for its technical expertise to construct the cable bridge, a statement here said. 

Dilip Buildcon will have a majority stake of 70 per cent in the joint venture firm while the remaining 30 per cent will be held by MBZ, it said. 

"This is our first project in Goa, and we hope to complete the project before time. Mostobudivelnyi Zahin, which has a vast experience in construction of cable suspension bridges, will be our technology partner," Dilip Buildcon Executive Director and CEO Devendra Jain said. 

This contract is part of the Rs 676.19-crore, 1.084-km-long project, which is expected to be completed in 36 months. 

"There are around 4-5 cable suspension bridges built on a large scale in India, and this would be the second-largest cable bridge length-wise in the country, after Vidyasagar Setu in Kolkata. With this contract, we are now present in 12 states," he said.

Will a new credit rating system for infrastructure projects help?

CARE expects the proposed system could help under-development projects with a rating agency stepping in at the pre-bid level of infrastructure projects

Mumbai: Finance minister Arun Jaitley on Monday announced the formation of a new credit rating system for infrastructure projects in the country for better credit enhancement.

A new credit rating system for infrastructure projects will give “emphasis to various in-built credit enhancement structures… instead of relying upon a standard perception of risk which often result in mispriced loans,” the budget statement said.

The intent seems to be to help infrastructure projects access credit from multiple sources and at better rates. However, it is unclear how the new system would be different from the existing credit rating scale put in place by credit rating agencies. It is also unclear whether the proposed rating system would be for operational projects or under-development projects or both.

“I have not seen the details, but if I draw a comparison with the banking rating system, how will it be different? Has the existing banking rating system helped?” asked a former government official, who has been closely associated to road project financing, but did not want to be named.

There are no clear answers as of now.

D.R. Dogra, managing director and chief executive officer of Credit Analysis and Research Ltd (CARE), expects the proposed credit rating system could help under-development projects with a rating agency stepping in at the pre-bid level of infrastructure projects. “A rating agency can help identify issues which lead to a lower rating at the pre-bid stage, which can then be addressed before private bids are invited,” said Dogra, adding that he is not aware of the details of the proposed credit rating system as it has not been discussed with rating agencies yet.

Not all are of the same view though.

A top official from another rating agency points out the new announcement speaks about credit enhancement. “Credit enhancement measures are taken only once the infrastructure projects are operational. This is the point where a refinancing can happen and bank credit can be replaced with bonds. A better rating makes the bonds market accessible in a better way,” he said. He refused to be identified as the agency is not aware what the actual fine print of the credit rating system would be.

Infrastructure consultant Vinayak Chatterjee, chairman for Feedback Infra Pvt. Ltd, is positive the new credit rating system would help the sector as the traditional rating methods do not fully take into account the risk in an infrastructure project which changes at different stages of the project life-cycle.

Even as the industry waits for details, a former rating agency official, who did not want to be named, said, “Need more clarity (on the details of the system), but mostly it would be inconsequential.”

India on course for recovery: IMF report

Pegs GDP growth at 7.5% for FY17; expects private investmentto pick up

New Delhi, March 2:  

In a thumbs-up to Finance Minister Arun Jaitley’s financial management, the International Monetary Fund has said that the Indian economy is on the path to recovery, helped by low crude oil prices, improving current account and fiscal deficits, as well as a sharp fall in inflation.

However, in its India: 2016 Article IV Consultation report, the IMF has pegged the country’s growth rate at 7.3 per cent this fiscal and 7.5 per cent for the next. This is marginally lower than Jaitley’s official estimate of 7.6 per cent GDP growth in 2015-16 and 7-7.75 per cent in 2016-17.

“The Indian economy is on a recovery path, helped by a large terms of trade gain (about 2.5 per cent of GDP), positive policy actions, and reduced external vulnerabilities,” said the report, which is based on the IMF’s consultations with officials from the Finance Ministry and the Reserve Bank of India.

With some uptick in industrial activity, the Washington-based international lender also expects a pick-up in private investment to help broaden the economic recovery.

The report has, however, warned that a number of economic risks remain. On the external front, it has highlighted a possible disruption from increased volatility in global markets, unexpected developments in US monetary policy and China’s slowdown.

On the domestic front, the IMF has listed the weakness in corporate financial positions and bad loans of banks, as well as the delay in reforms as risks that could weigh on growth, accelerate inflation and undermine sentiment.

“On the upside, further structural reforms could lead to stronger growth, as would a sustained period of low global energy prices,” it said.

The report also stressed the need for continued vigilance, growth-friendly fiscal consolidation, and sustained reforms to enhance the resilience of the economy and bolster potential growth.

Essential reforms

It said reform priorities include removing supply-side bottlenecks, especially in the agricultural and power sectors, and facilitating land acquisition. “Further reforms are also essential to boost employment in the formal sector, encourage female labour force participation, and enhance labour market flexibility more broadly,” said the IMF.

The report welcomed the adoption of flexible inflation targeting and the progress in enhancing monetary policy transmission, and said the RBI should be ready to tighten the monetary stance, if required, to control inflation.

Sun Capital Services

Budget 2016: Food marketing opened to MNC multi-brand retailers

In a major move, the government has opened the food sector to 100% foreign direct investment (FDI) to multi-brand retailers via the Foreign Investment Promotion Board..

In a major move, the government has opened the food sector to 100% foreign direct investment (FDI) to multi-brand retailers via the Foreign Investment Promotion Board (FIPB) route. Finance minister Arun Jaitley announced in the Budget, presented on Monday, that, “100% FDI will be allowed through the FIPB route in the marketing of food products produced and manufactured in India”.

This basically means that foreign retailers in the food sector can set up marketing outlets in the country but will have to sell food products manufactured by Indian producers. Analysts said this means that Global retailers like Marks and Spencer’s or Tesco, which have food services units, can now set up marketing outlets in the country where they can sell food products manufactured by Indian companies.

Food processing minister Harsimrat Kaur Badal said on Tuesday that 100% FDI will be permitted only in multi-brand retailing of food products, and not in all items. Also, while the extant rule on FDI in multi-brand retailing of any product mandates that at least 30% of raw materials have to be sourced from the domestic market, in food processing, a foreign retailer will have to procure 100% of raw materials from domestic sources to be eligible to bring in 100% FDI.

If a foreign retailer doesn’t wish to source the entire raw materials from the domestic market for multi-brand retailing in food products, it can still set up shop, but the FDI has to be restricted to 51%. Also, it has to fulfill the usual conditions stipulated for multi-brand retailing, food processing secretary Avinash Srivastava told FE.
Currently, rules allow foreign food firms to set up shop in the country to produce and market their products like Coca-Cola or Pepsi does. However, the new proposal opens room for any global retailer to simply market products manufactured by Indian companies.

“This can range from tying up with small domestic retailers making some specific food products, who do not have the wherewithal to expand, or having alliance with even big players. The detailed rules will be known when the department of industrial policy and promotion comes out with the guidelines,” says Harminder Sahni of Wazir Advisors, a New Delhi-based retail industry consulting firm. The new rules will now allow “foreign companies to set up up shops here and bring in a lot of technology such as cold chains” to reduce wastage and improve efficiency in farming.

The domestic consumer retail market is estimated at about R12 lakh crore, of which half consists of selling food and food products. The wastage of food from the farm before it reaches the consumer is estimated to be about 15%-20%, or about R92,000 crore, every year because of lack of storage facilities and transportation.

“Allowing 100% foreign investment in the retail of domestically-processed food will give farmers greater access to the market and also encourage food firms to innovate, so that food is available in enough quantities to feed everyone as well as fits their pockets” said Siraj Chaudhry, chairman of Cargill India, the firm that makes and sells the Leonardo range of olive oils, Gemini, NatureFresh, Sweekar, Rath and Sunflower Vanaspati.

Echoing similar sentiments, Krish Iyer, president of Walmart India, said the move would encourage the industry to produce locally rather than import food products and sell it here. “This far-reaching reform will benefit farmers, give impetus to food the processing industry and create vast employment opportunities,” Iyer said.

By Sun Capital