The promises of 2012-13

Written by Sunny Verma | Himani Kaushik | Updated: Feb 25 2013, 17:36pm hrs
As the countdown to this years Budget announcements gets smaller, it is a good time to take stock of some of the big announcements made in the previous Budget

Rajiv Gandhi Equity Savings Scheme

OBJECTIVE: The Rajiv Gandhi Equity Savings Scheme (RGESS) was announced in the Budget for 2012-13 with an objective to encourage flow of savings of small investors in domestic capital markets.

Envisaged as a game changer to enhance the equity culture in the country, the scheme allowed new investors under the annual income bracket of Rs 10 lakh to get an income tax deduction of 50% on investing up to R50,000 directly in equities or through mutual funds. This would be over and above the R1 lakh deduction under Section 80C.

STATUS: The scheme, although announced last year, did not get a green signal from the government and regulators till as late as early this month. Originally planned to allow new investors to decide for themselves where to invest, the scheme saw major changes with the entry of mutual funds into the scheme. And, despite best efforts, the scheme remains riddled with complex clauses and meagre tax benefits, doing very little to enthuse eager entrants.

First, the scheme is only for a new investor who has a gross total annual income of up to R10 lakh. So, any person who does not have a demat account, or despite having one, has not made any transactions till November 23, 2012, is alone eligible under the scheme.

A 50% deduction on investment up to R50,000 will earn an investor as less as R2,500-R5,000, which is a meagre incentive. As Amarpal Chadha, tax partner, Ernst & Young, says, The improving market sentiment should be the main driver for new investors, not small tax benefits as the ones offered by RGESS.

Moreover, the new investor can only avail of the deduction in the first year of investment. This one-time exemption makes it less attractive than equity linked savings schemes (ELSSs), investments in which are allowed a deduction every year. Chadha says the one-time exemption defeats the purpose of the scheme, adding, It should be allowed every year like ELSS. The focus should be on channelising long-term serious money into the capital market.

You can invest only in shares included in either BSE-100 or CNX-100 or equities of public sector undertakings (PSU) that are categorised as Maharatna, Navratna or Miniratna. This includes follow-on public offers of such shares. IPOs of a PSU whose annual turnover is not less than R4,000 crore are also eligible.

Some relief is that you can also invest in exchange traded funds (ETFs) and mutual fund (MFs) schemes with RGESS securities as underlying. Fund houses such as SBI, UTI, IDBI, and DSP Blackrock have lined up schemes focused on RGESS.

However, you need to pay 2-3% of the investment as fee, which is higher than brokerage charges. Also, since the MFs can only invest in the specified stocks, benefits from a certain level of diversification that a mutual fund can offer might get diluted.

The investments made under the scheme are locked-in for three years. The first year is a fixed lock-in period during which you cannot sell or pledge your investments. After the fixed lock-in period, the scheme generously allows selling or buying your investments in the next two years.

Though stocks have the potential to create wealth like no other asset class in the long term, they also carry a higher risk. First-time investors should refrain from buying stocks directly, even if these are blue chips or PSU stocks. For conservative investors, who have stayed away from the market, it doesnt make sense to enter now for a minor tax deduction, argues a market participant.

Concerned over the reluctance of savers to park surplus funds in financial instruments, Chidambaram is widely expected to modify RGESS in the forthcoming Budget to make it more attractive for the point of tax incentives for first-time investors.

New bank licences and other bills

OBJECTIVE: Paving the way for issuance of fresh banking licences, the Banking Laws (Amendment) Bill, 2012, was approved by both houses of Parliament last December. The Reserve Bank of India (RBI) had made issuance of licences contingent upon amendments to banking laws, which empowered RBI to supersede the board of directors of a banking company.

The Bill gave RBI more power to regulate banks, raised voting rights for investors in banks, allowed public sector banks to raise capital through bonus and rights issues and enabled banking companies to issue preference shares.

STATUS: Just ahead of the Budget, the central bank on February 22 announced the final bank licence norms, enabling corporate houses to apply for starting banking operations in the country.

Approval of the Bill is a significant milestone in the financial sector, and brings finality to one of the major proposals of the Union Budget 2012-13. Even as the banking sector reforms received a momentum, the insurance and pension reform Bills are still hanging fire due to lack of consensus among political parties. Officials say the government would table the Bills in the current Budget session.

For seeking a new banking licence, the minimum paid-up equity capital requirement for each bank is R500 crore. The RBI last gave licences to 12 private sector banks in two phases since the financial sector was opened up in 1991.

New licences are conditional on aspects such as financial inclusion and 25% of branches being in unbanked areas (which has been defined as those areas with population up to 9,999 as per the latest Census). In the new licence norms, there is no bar on real estate and broking sectors from applying. Public and private sector entities, including NBFCs, can apply for a bank licence by July 1 using a non-operative financial holding company (NOFHC) structure.

A minimum of 40% of the paid-up equity capital of the bank must be held by the NOFHC for five years and the holding must then be brought down to 15% in 12 years. There is a ceiling of 49% on the aggregate foreign shareholding for the first five years for the new players, after which it will be according to the current policy.

MFI BILL: Another legislation for Micro Finance Institutions (Development and Regulation) Bill, 2012, was introduced in Parliament last May. The Bill seeks to create a national regulatory framework for MFIs and making RBI the regulator of such institutions. It has been referred to the standing committee on finance.

DEBT MGMT AGENCY BILL: The government is yet to make up its mind for bringing a cabinet note on the Public Debt Management Agency of India Bill, 2012. Former FM Pranab Mukherjee had announced setting up of this agency to delink the RBIs role as a monetary authority from that of a government debt manager.

A central bank managing government debt is perceived to be biased towards a low-interest regime for reducing costs of sovereign debt even if it compromises its anti-inflation stance.

Financial holding company for PSBs

OBJECTIVE: A key proposal of last years Budget for setting up a financial holding company (FHC) to capitalise public sector banks (PSBs) is unlikely to fructify anytime soon. Then finance minister Pranab Mukherjee had said while announcing the Union Budget 2012-13 that the government would examine the possibility of creating an FHC, which will raise resources to meet the capital requirements of PSBs.

It was envisaged that the holding company would substantially leverage its capital base while infusing funds into banks. Given the massive funding requirements of the PSBs, the proposal was to come in handy at a time when the governments fiscal position remains stretched. The government is targeting to rein in the fiscal deficit at 5.3% of GDP in the current fiscal and pare it further down to 4.8% in 2013-14. State-owned banks require capital infusion of roughly R3.5-R4 lakh crore over the next eight years.

STATUS: Government sources say a proposal for setting up the FHC was earlier being prepared for consideration of the Union Cabinet. But it is now getting delayed as the government is yet to build a consensus of the structure and prudential norms of the company.

Capital infusion into PSBs is critical to enable them to expand credit disbursal in line with the needs of a growing economy. Fresh capital cushion is also needed to provide for the rising non-performing assets (NPAs) in the banking system and to meet stricter capital adequacy requirements under the Basel-III norms. The Basel-III capital ratioswhich seek to enhance core equity capital of the bankswill be fully phased in as on March 31, 2018, while the RBI has extended its implementation date by three months, to April 1, 2013.

Quick estimates place the additional capital requirement of banks on account of Basel III at R5 lakh crore, of which non-equity capital will be to the order of R3.25 lakh crore while equity capital will be to the order of R1.75 lakh crore, RBI said in its financial stability report for December 2012. In the Union Budget 2013-14 to be unveiled on February 28, finance minister P Chidambaram is expected to announce capital infusion of R20,000 crore in state-owned banks. In 2012-13, the government approved capital of R12,517 crore in state-owned banks.

State-owned banks have shown a significant jump in restructured assets and NPAs in recent quarters, necessitating increase provision for capital. Crisil Ratings has said Indias banks will need to raise R2.7 trillion by March 2018 to meet Tier-I capital requirements under Basel III. While Indias banks are comfortably placed to raise the equity capital component, the key challenge lies in raising non-equity Tier-I capital, given that the instruments features are riskier than under Basel II, Crisil said. It suggested development of bond market to raise non-equity capital. The government can consider investing in non-equity Tier-I instruments of public sector banks (PSBs) through the holding company for PSBs proposed by GoI, thereby developing market acceptance for such instruments, said Crisil Ratings president Ramraj Pai.

Liberalised External Commercial Borrowing

OBJECTIVE: The Union Budget for 2012-13 came as a blessing for debt-ridden sectors such as aviation, power and real estate, as the government provided an alternative to higher domestic cost of borrowings by extending the external commercial borrowing (ECB) window for these sectors.

The news was welcomed most by the airline industry, battling high debt and reluctance of Indian banks to lend money. Former finance minister Pranab Mukherjee permitted to raise ECB for working capital requirements of the airline industry for a period of one year, subject to a total ceiling of $1 billion.

STATUS: Though the proposal was initially cheered by the industry, later when clarity came that one airline company can raise only $330 million through ECB on approval route, experts shunned the proposal as a drop in the ocean for the sector.

The ECB route of raising funds is considered to be attractive as the cost is generally lower than that of mopping up funds in the domestic market. Also, the ECB provides borrowers with an additional avenue to access large amounts from the global financial market.

An aviation expert, requesting anonymity, points out, Repayment of such loans in foreign currency with the exchange rate situation prevalent last year may not have seemed attractive to airlines. Also, creditworthiness of the entities in view of their existing levels of debt, as well as extent of foreign exchange earnings itself in view of their mix of domestic and international operations could have been other key factors.

The cumulative debt of the airline industry currently stands at R66,400 crore, of which Air India has R43,777 crore, Kingfisher has R8,633 crore and Jet has R11,900 crore of debt on their balance sheets.

Moreover, lack of clarity on implementation of the $1-billion ECB window is cited as one of the reasons why most airlines did not make use of the offer. National carrier Air India is in talks with two international banks to raise $330 million through ECB for a while now, but still has no concrete proposal.

ECB, which totalled $35.9 billion in 2011-12, are considered attractive as cost of raising the loan is lower than that of domestic borrowings. Indian companies raised $1.15 billion in December last year.

A senior government official adds, Very few global banks will be interested in giving loans to Indian airline companies, given the stressed balance sheets. Only if fresh equity is pumped in, global banks may possibly have higher comfort in giving loans.

The finance ministry also allowed power sector companies to use up to 40% of ECB loans to refinance their rupee debt, provided the remaining 60% balance is utilised for investments in new projects.

The ECB window was also extended to low-cost affordable housing projects as well as for capital expenditure on the maintenance and operations of toll systems for roads and highways as long as they are a part of the original project.

Despite the Budget announcement in March last year, it took the Reserve Bank of India nearly 10 months to come out with a notification allowing ECB to eligible developers/builders for low-cost affordable housing projects and housing finance companies (HFCs) and National Housing Bank (NHB).

Through the notification in December last year, the RBI made National Housing Bank the nodal agency for deciding the projects eligibility as a low-cost affordable housing project. Once satisfied, the application shall be forwarded to the RBI for consideration under the approval route. Currently, a limit of $1 billion has been fixed for ECBs under the low-cost affordable housing scheme under the approval route and the limit shall be reviewed on an annual basis. The impact of cheaper foreign loans can only be seen in the coming months, as the delay in bringing out the procedural details proved to be a dampener for real estate companies.