Indian Economy News & Discussion - Nov 27 2017

[chetak]

There are still loopholes that need to be plugged. What is going to stop the Chinese from floating investments firms abroad and bring in the investment into India from Mauritius? That route has been open for long and has been used in some instances to whitewash ill gotten gains of ministers and industrialists.

participatory notes or PN

Plug this loophole ASAP.

It has NATSEC as well as huge economic risks associated with it as, apart from untraceable foreigners, it also enables a lot of shady players in India round trip their black money via this conveniently created and conveniently unplugged route.

It involves overseas investors who wish to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).

[khan]

There are still loopholes that need to be plugged. What is going to stop the Chinese from floating investments firms abroad and bring in the investment into India from Mauritius? That route has been open for long and has been used in some instances to whitewash ill gotten gains of ministers and industrialists.

The words “Beneficial Owner” in the new GOI policy. Doesn’t matter where the money is channeled from - what matters is the “Beneficial owner”.

[arshyam]

There are still loopholes that need to be plugged. What is going to stop the Chinese from floating investments firms abroad and bring in the investment into India from Mauritius? That route has been open for long and has been used in some instances to whitewash ill gotten gains of ministers and industrialists.

participatory notes or PN

Plug this loophole ASAP.

It has NATSEC as well as huge economic risks associated with it as, apart from untraceable foreigners, it also enables a lot of shady players in India round trip their black money via this conveniently created and conveniently unplugged route.

It involves overseas investors who wish to invest in Indian stock markets without registering themselves with the market regulator, the Securities and Exchange Board of India (SEBI).

Looks like it's mostly become irrelevant of late, given the tightened rules for P-notes (KYC, applying anti-money laundering rules, etc.)


Source: Who uses P-Notes anyway? - Live Mint, Updated: 01 Jun 2017, 10:42 AM IST Mobis Philipose

This 2016 article predicted the decline above based on tightened SEBI rules: Sebi norms will gradually make P-Notes irrelevant - Live Mint, Updated: 21 May 2016, 11:32 AM IST Jayshree P. Upadhyay

Everything you want to know about P-Notes - ET By Dia Rekhi, ET Bureau| Last Updated: Jul 29, 2016, 10.33 AM IST

From January 2011, FIIs have had to follow KYC norms and submit details of transactions. In 2014, new rules on foreign portfolio investors (FPIs) made it mandatory for those issuing P-Notes to submit a monthly report disclosing their portfolios. This led to a decline in the number of entities issuing P-Notes. More recently, Sebi mandated that in addition to KYC, the anti-money laundering rules (AML) will also be applicable to P-Note holders. Earlier, a P-Note holder had to adhere to KYC or AML norms of just their home jurisdiction. Sebi also issued norms on transferability of P-Notes between two foreign investors and increased the frequency of reporting by P-Note issuers.

Do regulators wish to ban P-Notes? Sebi is not in favour of banning the instrument as it is used globally in many markets. In a recent interview to ET, Sebi chairman UK Sinha said: "Participatory notes, in Sebi’s and government’s views, are legitimate instruments that are required for normal financial transactions and are prevalent in all the larger markets." It is nothing unique to India and there are business reasons for having these transactions through PNs. According to Sinha, out of the 9,000 FPIs registered with Sebi, 37 are issuing P-Notes.

I'll let economic gurus on this thread comment on whether this is the right thing to do, etc., but the data shows this has become mostly irrelevant to the broader scheme of things.

[khan]

You guys need to relax about this foreign ownership paranoia.

Change of control/takeover over any publicly listed company is a years long very public (often acrimonious) process and cannot just happen without anyone noticing.

And change of control of companies to a foreign buyer is subject to incredible scrutiny by the takeover target government. This happens in every Government, not just India.

And since India put in place this beneficial owner rule, there are most likely penalties to go with the violation of these rules (usually a forced fire-sale of the shares acquired in violation of the rule, plus a fine or outright forfeiture of the shares purchased).

I guarantee you, if there is any change of control of a large company in India (or any other country), it is standard operating procedure to give the acquirers a colonoscopy.

All these “loopholes” - might not actually be loopholed, but a specially created pathways for foreign players to invest in India, without giving them the ability to change management - which is a good thing. Give the regulators some credit, they aren’t stupid.

[shaun]

What happened to Ranbaxy ?

[vishvak]

What happened to Ranbaxy ?

Two sauve hardworking entrepreneurs made big pharma company that ran into US drug probe? The two are brothers and still at stage of sorting out the stuff. They paid 550 million $ for settlement and 500 million $ for not divulging info to foreign investors and still fighting for what now. Just saying it's not about loopholes always.

[Yagnasri]

There are in fact SEBI guidelines on the takeover and buying shares above certain %. Those transactions exceed certain % include that of pledge etc are to be reported to every stock exchange wherein the shares are listed. The reporting shall be done within 2 working days and the information is public.

[Bart S]

There are still loopholes that need to be plugged. What is going to stop the Chinese from floating investments firms abroad and bring in the investment into India from Mauritius? That route has been open for long and has been used in some instances to whitewash ill gotten gains of ministers and industrialists.

The words “Beneficial Owner” in the new GOI policy. Doesn’t matter where the money is channeled from - what matters is the “Beneficial owner”.

It would be better though if they just made it applicable across the board. China is not the only problem, apart from Chinese proxies (or Hong Kong based entities for that matter) we should also be careful about anybody attempting the same.

[Bart S]

When the pig squeals loudly, you can be sure that the stone that you threw hit the target

Global Times
@globaltimesnews
GT Voice: India's new foreign investment rule should not constitute restriction for Chinese capital https://bit.ly/2Vk1Nnp
3:10 AM · Apr 20, 2020·Buffer

[chetak]

Facebook buys $5.7 billion stake in Reliance Jio: 5 things you should know about it

Facebook’s investment translates into a 9.99% equity stake in Jio platform on a fully diluted basis.

Facebook on April 22 announced that it was investing $5.7 billion in Reliance Jio.

“Today we are announcing a $5.7 billion, or INR 43,574 crore, investment in Jio Platforms Limited, part of Reliance Industries Limited, making Facebook its largest minority shareholder,” Facebook wrote in a press release.

The company said that as a part of the investment Facebook said that it would collaborate with Jio to create new ways for people and businesses to operate more effectively in the growing digital economy. “For instance, by bringing together JioMart, Jio’s small business initiative, with the power of WhatsApp, we can enable people to connect with businesses, shop and ultimately purchase products in a seamless mobile experience,” Facebook wrote in a press release.

Here are top five things that you should know about the collaboration:

1. Facebook’s investment translates into a 9.99% equity stake in Jio platform on a fully diluted basis. This is the largest investment for a minority stake by a tech company in an Indian firm.

2. This is also the largest foreign direct investment (FDI) for a minority investment in India.

3. Focus on small and micro businesses: As a part of the partnership, the two companies will focus on 60 million micro, small and medium businesses in India. This includes nearly 120 million farmers, 30 million small merchants and millions of small and medium enterprises in the informal sector. The two companies will also work closely to ensure that consumers are able to “access the nearest kiranas who can provide products and services by transacting seamlessly with JioMart using WhatsApp.”

4.WhatsApp Reliance Retail: In addition to the investment, Jio Platforms, Reliance Retail and WhatsApp have entered into a partnership to “accelerate Reliance Retail’s New Commerce business on the JioMart platform using WhatsApp and to support small businesses on WhatsApp.”

5. The latest collaboration valuates Jio $65.95 billion.

[hanumadu]

Facebook buys $5.7 billion stake in Reliance Jio: 5 things you should know about it

Facebook’s investment translates into a 9.99% equity stake in Jio platform on a fully diluted basis.

Facebook on April 22 announced that it was investing $5.7 billion in Reliance Jio.

“Today we are announcing a $5.7 billion, or INR 43,574 crore, investment in Jio Platforms Limited, part of Reliance Industries Limited, making Facebook its largest minority shareholder,” Facebook wrote in a press release.

How much did RIL invest into Reliance Jio? This valuation must already be at least 1 lakh crore more than it invested.

What are the other telecom companies doing?

[amdavadi]

RIL investment in reliance jio is about $50 billion.

[Bart S]

GOI should ensure that the RIL-Facebook deal does not impinge on consumer choice or net neutrality. And not let it be leverage for Facebook to not play ball on govt requests for data retention, account tracking, censorship of anti-national material etc.

Last time around Facebook and their desi shills were trying to promote 'free Internet', of course the price was that Facebook would be the portal for said Internet access. Thankfully the govt stood it's ground on net neutrality and then the 4G rollout brought cheap data and upended the whole business model (thanks, ironically to Jio).

This thread has some thoughts (still speculative) on what the end-goal may be:
https://twitter.com/tanvi_ratna/status/ ... 9360037888

[vijayk]

https://www.business-standard.com/artic ... 073_1.html
Mukesh Ambani set to build Alibaba-like $24-bn e-commerce giant for India
The move is the latest sign of the Reliance group's pivot towards data and digital services for future growth, as it builds an online platform to take on the likes of Amazon and Flipkart in India

[Vips]

Facebook-Jio deal may turn WhatsApp into super app like WeChat in China.

Facebook and Jio made a big announcement on April 22. Big in numbers, big in potential impact. Facebook said that it was investing $5.7 billion in Reliance Jio, acquiring 9.99 per cent stake in the process and valuing Jio at $65.95 billion. Big numbers. The plans from Jio and Facebook will surely unfold in future but for now, it seems that the whole partnership is aimed at making WhatsApp, which is owned by Facebook, a sort of super app where users will not only be able to chat but will also be able to buy their groceries or pay for their haircut.

In a way, it seems that Facebook and Jio hope to turn WhatsApp into what WeChat is in China, by integrating WhatsApp with JioMart, which is a Jio service aimed at bringing local kirana stores to online.

To see what WeChat can do in China, and WhatsApp may turn into in India, consider this:

-- In one way, WeChat is a messaging app just like WhatsApp. Users can add as many people to chat with as possible. They can upload images, videos, and also share it with their contacts. The users can comment, like, or react to your posts on the app.

-- But then there is more. Much more. And all that WeChat can do, and allows its users to do, is powered by its payment system. WeChat facilitates payments in China. Using WeChat, users in China can shop at some of the biggest supermarkets to the smallest vendors including the fleet services. This is quite similar to how Paytm functions, but unlike Paytm, WeChat is big on both fronts: communications and payments.

-- Money can be transferred using WeChat by scanning a barcode. Users can also transfer money instantly to their WeChat contacts.

-- WeChat is called a super-app because it provides all the services under one platform. You don’t have to download separate apps if you want to book a cab or book a hotel and flights and even movie tickets.

Now consider India. And WhatsApp. In India, users require separate apps for ride-hailing, booking hotels, or movie tickets. Some people use Paytm for something, some people use Google Pay. Some people use Zomato for ordering food. And so on and so forth. What if all of this is possible on just one app.

Facebook and Jio seem to believe that this app can be WhatsApp, which is already there on almost every smartphone in India. But what it lacks right now is a good payment system, which is in beta and needs regulatory approvals from the Indian government to go ahead, and an effective merchant network.

On both counts, it seems Jio can help Facebook. Jio is India’s one of the biggest telecom companies, and part of the Reliance group and association with it may help Facebook get regulatory approvals for WhatsApp payments.

Two, by integrating the JioMart, which is an offline-to-online platform for small merchants, local stores like Kirana shops, small businesses, with WhatsApp, Facebook and Jio may create a platform that will serve in India the kind of role that WeChat does in China.

In fact, recently there was a report in the Economic Times that both Facebook and Jio are looking to create a super app. "The idea is to create an app that is not just a communication platform but one where users would also be able to buy groceries through Reliance Retail stores, or shop at ajio.com, or make payments using JioMoney," the report had noted.

The deal between Facebook and Jio today confirms that indeed this is the plan. The e-commerce part is mention by both Facebook and Jio in their note to the media. Here is what Jio said, “Our focus will be India’s 60 million micro, small and medium businesses, 120 million farmers, 30 million small merchants and millions of small and medium enterprises in the informal sector, in addition to empowering people seeking various digital services.”

In the coming months, WhatsApp could be an app where Indian users will not just talk but also buy, and with each purchase, Jio and Facebook will get a cut to enable the transaction.

[yensoy]

^^^^ This will run afoul of just about every anti-monopoly law. Not to speak of widespread opposition from all the local kirana stores and their associations. Even the limited easing of lockdown to permit online deliveries was withdrawn.

There is a place for Jio as long as their market share stays in the single digit percentages.

Things work differently in China. The small players were told to pack up or join the 2 biggies. Yes it is super convenient but it has to be pushed by the government and therefore becomes anti-competitive.

[Raveen]

^^^^ This will run afoul of just about every anti-monopoly law. Not to speak of widespread opposition from all the local kirana stores and their associations. Even the limited easing of lockdown to permit online deliveries was withdrawn.

There is a place for Jio as long as their market share stays in the single digit percentages.

Things work differently in China. The small players were told to pack up or join the 2 biggies. Yes it is super convenient but it has to be pushed by the government and therefore becomes anti-competitive.

It is not a monopoly as long as there are competitors with more than low single digit market share. I think you misunderstand how anti-trust/monopoly laws work. There is nothing preventing Ola from fighting WhatsApp if it comes to that. Little mom and pop corner stores, well, one way or another, those days are numbered in their current inefficient tax evading form.

[Philip]

40% of the defence sector MSMEs will be " wiped out" within 3 to 4 months, according to Ernst and Young,unless the govt. gives them a support package. The lockdown until May,may be further extended say media reports today.Many industries and businesses across the country will go under if they are not allowed to restart. For industrial work to begin recovering, It requires the transport sector to also resume services, to transport raw materials,machinery, of finished goods,etc.,plus workers!!

[sajo]

Corner Kirana stores can still function as micro DCs. Apps and backend will make it easier to analyse area trends, and make it easy for progressively larger distribution centers to arrange logistics to specific endpoints. Kirana store can continue his independent ops, while also stocking these e-store type goods. Easier to track inventory, sales and more importantly, taxable income. Kirana stores can have the option of listing their own goods on the app, at a price of their choosing, but for viewing only. The possibilities of taking the corner Kirana online should open up tremendous opportunities. They are already in initial stages like many of them owning business WhatsApp accounts and taking orders from them.

[Raveen]

Corner Kirana stores can still function as micro DCs. Apps and backend will make it easier to analyse area trends, and make it easy for progressively larger distribution centers to arrange logistics to specific endpoints. Kirana store can continue his independent ops, while also stocking these e-store type goods. Easier to track inventory, sales and more importantly, taxable income. Kirana stores can have the option of listing their own goods on the app, at a price of their choosing, but for viewing only. The possibilities of taking the corner Kirana online should open up tremendous opportunities. They are already in initial stages like many of them owning business WhatsApp accounts and taking orders from them.

...and at that point it will stop resembling the inefficient form that it exists in today.

[M_Joshi]

40% of the defence sector MSMEs will be " wiped out" within 3 to 4 months, according to Ernst and Young,unless the govt. gives them a support package. The lockdown until May,may be further extended say media reports today.Many industries and businesses across the country will go under if they are not allowed to restart. For industrial work to begin recovering, It requires the transport sector to also resume services, to transport raw materials,machinery, of finished goods,etc.,plus workers!!

Non-essential industries in HP have re-started albeit with some conditions like with only 30% labour in a single shift & proper procedure for worker safety. Transport has anyways been allowed everywhere. No commercial vehicle is being stopped now. It is the services sector which will be most hit by this. Even if lockdown is lifted 100% tomorrow, it will be a while before people will go to restaurants, or malls, go to vacations or any non-essential outings.

[sajo]

That was quick!

Amazon rolls out programme to list local shops as sellers

Online retailer Amazon on Thursday said it will invest Rs10 crore in ramping up a pilot program that saw the online seller already reach out to 5,000 local stores selling electronics, apparel, toys, furniture, grocery, home furnishings, to list on its platform as the company continues to expand its range of sellers and products.

Amazon already works with millions of sellers in India—those that are manufacturers, online-only sellers or even retailers who sell their products on its marketplace.

However, given how shopping patterns will alter after the Coronavirus outbreak, the retailer said it has ramped up the programme that will enable offline retailers, some with no prior experience of selling online, to list on its website.

This makes India among the first markets where Amazon will engage at scale with local shop owners that drive a bulk of the country's retail trade and are indispensable to daily shopping habits here.

Link : https://www.livemint.com/companies/news ... 18311.html

[Manish_Sharma]

Twitter
@harshmadhusudan :

Dear PM @narendramodi ji this will be a gargantuan mistake if you further increase taxes on those earning 10 lakh and more
https://t.co/bC3vWesIew
Your formalisation agenda will go for a toss, and the economy will be hurt. Do not go down that road please. It would be very tragic.

Dear @PMOIndia the moderate Laffer curve impact applies to Indian income taxes. Far from raising taxes you must cut them back to pre-2019 levels. That is only way to increase revenue + compliance over medium term. In the short term, please do not listen to Urjit Patels. Monetise.

This is a make or break decision. A crisis reveals true instincts. We cannot build a modern Indian state by squeezing a small base. We have to lower rates and widen the base.

How to communicate that is your responsibility as the country’s leader. Class warfare will be resisted.

The tragicomic thing is our macro has never been fundamentally better (in part because of NM’s first term of prudent policies)

But who will get the point across that a country with little foreign debt, excess capacity, low core inflation is well placed for QE + infra + tax cuts?

I am speaking up now because it is better to preempt such a suicidal policy decision rather than to react to it when reversal becomes politically difficult as we saw in 2019.

Well wishers of India and PM Modi should speak up now - blanket “gun gaan” toh kiraye ke log karenge hi.

https://twitter.com/harshmadhusudan/sta ... 79589?s=19

https://theprint.in/economy/covid-19-ce ... ssion=true

Covid-19 cess, 40% tax for rich – IRS officers offer economy-revival tips to Modi govt

In a policy paper to be submitted to PM Modi, 50 IRS officers have proposed a 4% Covid-19 cess on taxable income of over Rs 10 lakh, among other suggestions.

Raising income tax rate to 40 per cent for those who earn over Rs 1 crore a year, re-introduction of wealth tax, effecting a one-time Covid-19 cess of 4 per cent on taxable income of over Rs 10 lakh, direct cash transfer of up to Rs 5,000 a month for the poor, a three-year tax holiday for all corporates and businesses in the healthcare sector — these are some of the recommendations made by over 50 officers of the Indian Revenue Service (IRS) to help the economy recover from the lockdown.

The recommendations are part of a policy paper titled “Fiscal Options & Response to Covid-19 Epidemic (FORCE), which the IRS Association is all set to present to the Prime Minister’s Office (PMO). It has already been sent to the Central Board of Direct Taxes (CBDT), sources said.

The paper, a copy of which is with ThePrint, delves into several steps the officers think are needed to revive the economy, by raising additional revenue without burdening the common man.

“The government needs to spend considerably more to revive the economy and it needs to raise additional revenue, but in ways that must not burden the already distressed common man,” the paper says. “In times like these, the so-called ‘super-rich’ have a higher obligation towards ensuring the larger public good.”

Tax the rich, paper argues

To this effect, the paper recommends raising the highest income tax slab rate, for total income levels above Rs 1 crore, to 40 per cent, or re-introduction of the wealth tax for those with a net wealth of Rs 5 crore or more.

“The government can then identify 5-10 most crucial projects or schemes entailing significant expenditure, which are likely to have a decisive impact on reviving the economy. The government should commit itself to the fact that the additional revenue raised through taxing the wealthy will only and only be utilised for these 5-10 projects or schemes,” the paper argues.

The paper also recommends an additional one-time cess of 4 per cent on account of Covid-19 relief, to be levied on those with a taxable income of more than Rs 10 lakh. The extra revenue generated through this could be between Rs 15,000 to Rs 18,000 crore, the officers estimate.

There should also be mobilisation of CSR funds for Covid-19 relief by extending tax incentives. Corporates, the officers argue, may be allowed to treat the salaries paid to their non-managerial staff during the Covid-19 crisis as part of their obligation under CSR, in order to incentivise continued wages during non-working days.

The paper also recommends a new tax-saving scheme, for example, a Covid-19 savings certificate, in order to mobilise more funds.

‘Increase equalisation levy for e-commerce firms’

The paper states that since the coronavirus economy is largely a digital/online/e-commerce one, the tax imposed on online companies such as Netflix, Amazon Prime and Zoom, among others, under the equalisation levy or “Google Tax” can be increased from 6 per cent to 7 per cent for their ad services, and from 2 per cent to 3 per cent for e-commerce work.

“The equalisation levy collection for FY 2017-18 was Rs 550 crore and FY 2018-19 was Rs 939 crore,” the paper states. “Going by the growth of business in the sector, the said increase in rate is likely to contribute a good amount of increased revenue. Moreover, since the levy is not part of the Income Tax Act, it would not be subject to the provision of India’s income tax treaties.”

‘Ensure DBT for the poor’

On the expenditure front, the paper suggests a direct cash transfer of Rs 3,000 to Rs 5,000 a month for the most economically disadvantaged 12 crore households over a period of at least six months.

It also argues that the crisis offers an opportunity to expand MGNREGA and make public works programmes such as building of rural roads, public health infrastructure, primary school buildings and the like the focus of the scheme.

“If envisioned and implemented in a targeted fashion, the scheme continues to hold tremendous promise, and can achieve three prized objectives together: provision of income support through employment for the jobless, creation of public infrastructure, and investment in human capital,” the paper recommends.

‘Let healthcare sector drive economy’

The paper also states that the government should ensure the health sector serves as the driving force for economic growth for the next year or so.

“From a taxation perspective, a complete tax holiday or tax break is proposed for the next three years for all corporates, firms and businesses operating in the healthcare sector,” it states. “The scope can have an exclusive definition, and must incorporate manufacturing of pharmaceuticals, medical grade masks, gloves, gowns, ventilators, testing labs, construction contractors involved in building of hospitals/primary health centers, etc.”

‘Steps to boost consumption’

In order to boost consumption and increase disposable income, the paper recommends measures such as allowing short-term capital loss suffered by retail investors due to the recent stock market slump to be set off from their salary, that is, sparing them any tax liability on the money lost.

It also wants the government to not consider bonuses or any other allowances given to employees with an annual pay of less than Rs 10 lakh as taxable income, to allow the deferral of tax payment by individuals who have lost their jobs for six months or until they find a new job, and providing increased deduction interests over the purchase of houses, automobiles, and electronic items that are made in India.

The paper also makes a slew of recommendations to boost the MSME sector, which, it argues, is bound to be the worst-hit by the crisis. These include a tax moratorium for MSMEs whose total tax liability is less than Rs 5 crore-10 for one year.

[chetak]

^^^^^^^


for the taxman, more taxes are the only solution.

This answer is genetically coded into him.

If you ask a butcher as to what is best for the benefit of the goat, his answer will always be "biryani"

[Krita]

Twitter
@harshmadhusudan :

Dear PM @narendramodi ji this will be a gargantuan mistake if you further increase taxes on those earning 10 lakh and more
https://t.co/bC3vWesIew
Your formalisation agenda will go for a toss, and the economy will be hurt. Do not go down that road please. It would be very tragic.

Dear @PMOIndia the moderate Laffer curve impact applies to Indian income taxes. Far from raising taxes you must cut them back to pre-2019 levels. That is only way to increase revenue + compliance over medium term. In the short term, please do not listen to Urjit Patels. Monetise.

This is a make or break decision. A crisis reveals true instincts. We cannot build a modern Indian state by squeezing a small base. We have to lower rates and widen the base.

Strange coincidence, Pinki has tweeted the same.
These morons passed a tough exam to give such a simplistic cheguvera model which emphasizes on punishing the si called bourgeois. No shi* sherlock, the bureaucrats are dharti pe bhoj.

[Mollick.R]

CBDT initiates inquiry on IRS officers for unsolicited report on funding COVID relief work
Press Trust of India April 26, 2020 Last Updated at 21:18 IST

In a statement, the CBDT, which is the apex policy making body for direct tax policies, said it has never asked IRS Association or these officers to prepare such a report. The CBDT on Sunday said an inquiry is being initiated against 50 IRS officers of the I-T department who have penned an unsolicited report on revenue mobilisation to fund COVID-19 relief measures and made it public without permission.

In a statement, the Central Board of Direct Taxes (CBDT), which is the apex policy making body for direct tax policies, said it has never asked IRS Association or these officers to prepare such a report and no permission was sought by them before making the report public.

"It is unequivocally stated that CBDT never asked IRS Association or these officers to prepare such a report.

"No permission was sought by the officers before going public with their personal views and suggestions on official matters, which is a violation of extant Conduct Rules. Necessary inquiry is being initiated in this matter," the CBDT said.

It further said the "impugned report" does not reflect the official views of CBDT/Ministry of Finance in any manner.

https://www.business-standard.com/artic ... 967_1.html

[Yagnasri]

About time. The entire drama clearly looking like a motivated effort by a section of baboons to defame the GoI and derail any efforts to revive the economy.

[Uttam]

I have lost faith in credit rating agencies. Not that I trusted them much in terms of fully assessing credit risk. They are really discriminatory in their dealings with India versus western nations. Here is an example:

India's rating could come under pressure if fiscal outlook worsens: Fitch

Fitch Ratings on Tuesday said India's sovereign rating could come under pressure if there is further deterioration in fiscal outlook as a result of lower growth or fiscal easing. The statement comes amid reports of further fiscal easing to support growth over the extended coronavirus lockdown

I haven't seen such warnings for EU or US who have opened fiscal as well as monetary fire hoses. Then why this grandstanding against India. In this time of generational crisis, shouldn't they be looking inward and re-examining their credit rating models?

[Suraj]

I have lost faith in credit rating agencies. Not that I trusted them much in terms of fully assessing credit risk. They are really discriminatory in their dealings with India versus western nations. Here is an example:
India's rating could come under pressure if fiscal outlook worsens: Fitch

Fitch Ratings on Tuesday said India's sovereign rating could come under pressure if there is further deterioration in fiscal outlook as a result of lower growth or fiscal easing. The statement comes amid reports of further fiscal easing to support growth over the extended coronavirus lockdown

I haven't seen such warnings for EU or US who have opened fiscal as well as monetary fire hoses. Then why this grandstanding against India. In this time of generational crisis, shouldn't they be looking inward and re-examining their credit rating models?

Follow the money, and it makes sense. It's not discrimination - it's gaming the system to extract benefits. Here's how. One would think that a nation whose sovereign debt is under constant ratings pressure has very little demand due to the heightened risk .

But no, that's not true - India is amongst the most attractive choices of EM debt. Not just Indian debt, but rupee-denominated Indian debt. So why would anyone with a brain buy debt of a nation teetering on the brink , in that nations own currency ? How can they be stupid twice over - exposure to default and exposure to exchange rate risk ? Because neither of those factors are compelling. India has a stellar record at debt management, having never defaulted on external loans, and having historically been the largest beneficiary of loans from IBRD (World Bank) - an entity with whom India has a long mutually beneficial relationship.

So what do the ratings agencies do here ? They keep the coupon rate high, enabling funds to pick up Indian debt - in Rupees mostly - at low prices and high yields. For 4-5 years now, RBI has annually increased the limit of foreign holding of Indian central, state and corporate bonds, due to continued and sustained demand from foreign bond funds. Eg:
Mar 30 2020: FPI limit in corporate bonds raised to 15% for FY21
Jan 24 2020: RBI ups investment limit for FPIs in govt, corporate bonds
and older news:
Jan 2018: India marginally eases foreign investment rules, raises foreign investment in corporate debt to 9% (now up to 15% for next fiscal)

Remember, this is all Indian Rupee denomninated debt. It's not masala bonds listed on LSE/NYSE in GBP or USD, but Indian bonds on Indian market in Rupees, with SEBI's oversight, and RBI's control over capital account convertibility. They're ok with all this - the pressure from ratings agencies just ensures higher coupon rates. It's basically fiscal 'Islam khatre me hain' handwaving, so to speak...

It's Bloomberg Quint, but still:
India Opens Access to Benchmark Sovereign Bonds in Index Bid

[Rahul M]

Is the coupon rate tied to ratings or do the central bank etc have an option of amending that if it fills the rating is unfair ?

Complete novice here, so ....

[Uttam]

Is the coupon rate tied to ratings or do the central bank etc have an option of amending that if it fills the rating is unfair ?

Complete novice here, so ....

Issuers (=borrower) assign a coupon rate such that the bond is sold at par, meaning neither at discount nor at premium. For example a bond with a par value of Rs. 100, will be sold at Rs 100 if the coupon rate equals its yield, which is determined by investors.

The rating company assigns a rating based on default and other risks associated with the security. Investors look at other securities with same rating and use their yield as a benchmark. Investors then make their own assessment of risk associated with that security and place bids. If investors think that the coupon rate is lower than the yield they are demanding, then they will place a bid of less than Rs. 100 and vice versa. If the bond is priced at less than Rs 100, then its effective yield will be higher than its coupon rate.

Both investors as well as borrowers care for the yield, which is a combination of the price of the bond as well as its coupon.

While investors use their assessment to decide what yield they will demand, it is still largely driven by the rating assigned by the credit rating agency. This happens because of some institutional reasons. For example, insurance companies are not allowed to buy bonds with less than BBB rating (aka investment grade). The credit rating agencies therefore have a huge influence.

[Suraj]

Is the coupon rate tied to ratings or do the central bank etc have an option of amending that if it fills the rating is unfair ?

Complete novice here, so ....

You can set the interest rate by fiat to any number you want. The questions are,
a) will anyone buy it
b) can you afford it
If you set the coupon rate too low compared to perceived risk, you'll have few buyers since the market demands more risk premium on such debt. If you set it way too high to afford through your own debt servicing plans, the market may gleefully buy but you'll bankrupt yourself soon keeping up high interest payments.

By keeping Indian debt at the lowest Investment Grade tier for a long time, the risk is still acceptable to all international bond funds, but the yields remain high too, which we pay for through high cost of money. India has remained rated BBB- at both S&P and Fitch (their respective lowest investment grade) and Baa2 at Moodys (one level above the minimum Baa3 grade, unchanged since approximately 2013.

Meanwhile:
Capital Curbs Stymie Foreign Investors Eager to Buy India Bonds
The RBI has progressively raised limits on peak foreign holding of Rupee-denominated central, state, local and corporate debt about 20 times in the past 5 years, with each limit getting saturated very quickly.

The dichotomy between the ratings agencies basically pretending nothing has improved in almost a decade. and EM bond funds pushing for even greater access to Indian local currency denominated government and private debt, is almost a joke now. In my opinion, India needs a strong and independent domestic ratings agency capable of gaining broad acceptance of the local market. CRISIL was to serve that purpose, but they've been majority owned by S&P since 2005.

[nandakumar]

Is the coupon rate tied to ratings or do the central bank etc have an option of amending that if it fills the rating is unfair ?

Complete novice here, so ....

You can set the interest rate by fiat to any number you want. The questions are,
a) will anyone buy it
b) can you afford it
If you set the coupon rate too low compared to perceived risk, you'll have few buyers since the market demands more risk premium on such debt. If you set it way too high to afford through your own debt servicing plans, the market may gleefully buy but you'll bankrupt yourself soon keeping up high interest payments.

By keeping Indian debt at the lowest Investment Grade tier for a long time, the risk is still acceptable to all international bond funds, but the yields remain high too, which we pay for through high cost of money. India has remained rated BBB- at both S&P and Fitch (their respective lowest investment grade) and Baa2 at Moodys (one level above the minimum Baa3 grade, unchanged since approximately 2013.

Meanwhile:
Capital Curbs Stymie Foreign Investors Eager to Buy India Bonds
The RBI has progressively raised limits on peak foreign holding of Rupee-denominated central, state, local and corporate debt about 20 times in the past 5 years, with each limit getting saturated very quickly.

The dichotomy between the ratings agencies basically pretending nothing has improved in almost a decade. and EM bond funds pushing for even greater access to Indian local currency denominated government and private debt, is almost a joke now. In my opinion, India needs a strong and independent domestic ratings agency capable of gaining broad acceptance of the local market. CRISIL was to serve that purpose, but they've been majority owned by S&P since 2005.

The maximum amount that FPI can invest in Government securities has not been fully utilised by EM bond funds and other foreign investors. The problem as far as I understand is this. Many funds are, by their, constitution or trust deed or whatever cannot invest in an economy that has capital account restrictions at an economy wide level. Of course India had never put any fetters on repatriation of monies that has legally entered the country. Having said that capital account controls are a feature of Indian economy. To get around this problem the Government has decided to issue rupee denominated bonds which will, by the terms of their issue will explicitly provide for unfettered repatriation. Hopefully this will happen soon.

[kit]

I have lost faith in credit rating agencies. Not that I trusted them much in terms of fully assessing credit risk. They are really discriminatory in their dealings with India versus western nations. Here is an example:
India's rating could come under pressure if fiscal outlook worsens: Fitch


I haven't seen such warnings for EU or US who have opened fiscal as well as monetary fire hoses. Then why this grandstanding against India. In this time of generational crisis, shouldn't they be looking inward and re-examining their credit rating models?

Follow the money, and it makes sense. It's not discrimination - it's gaming the system to extract benefits. Here's how. One would think that a nation whose sovereign debt is under constant ratings pressure has very little demand due to the heightened risk .

But no, that's not true - India is amongst the most attractive choices of EM debt. Not just Indian debt, but rupee-denominated Indian debt. So why would anyone with a brain buy debt of a nation teetering on the brink , in that nations own currency ? How can they be stupid twice over - exposure to default and exposure to exchange rate risk ? Because neither of those factors are compelling. India has a stellar record at debt management, having never defaulted on external loans, and having historically been the largest beneficiary of loans from IBRD (World Bank) - an entity with whom India has a long mutually beneficial relationship.

So what do the ratings agencies do here ? They keep the coupon rate high, enabling funds to pick up Indian debt - in Rupees mostly - at low prices and high yields. For 4-5 years now, RBI has annually increased the limit of foreign holding of Indian central, state and corporate bonds, due to continued and sustained demand from foreign bond funds. Eg:
Mar 30 2020: FPI limit in corporate bonds raised to 15% for FY21
Jan 24 2020: RBI ups investment limit for FPIs in govt, corporate bonds
and older news:
Jan 2018: India marginally eases foreign investment rules, raises foreign investment in corporate debt to 9% (now up to 15% for next fiscal)

Remember, this is all Indian Rupee denomninated debt. It's not masala bonds listed on LSE/NYSE in GBP or USD, but Indian bonds on Indian market in Rupees, with SEBI's oversight, and RBI's control over capital account convertibility. They're ok with all this - the pressure from ratings agencies just ensures higher coupon rates. It's basically fiscal 'Islam khatre me hain' handwaving, so to speak...

It's Bloomberg Quint, but still:
India Opens Access to Benchmark Sovereign Bonds in Index Bid

Why are fiscal ratings not comparative ?.. the gold standard indexes are nowhere near good at this point ., and if they are not comparative in risk assessment what are they for ?..just "ratings" ? .. i am talking about international rating agencies btw

[Suraj]

The maximum amount that FPI can invest in Government securities has not been fully utilised by EM bond funds and other foreign investors. The problem as far as I understand is this. Many funds are, by their, constitution or trust deed or whatever cannot invest in an economy that has capital account restrictions at an economy wide level. Of course India had never put any fetters on repatriation of monies that has legally entered the country. Having said that capital account controls are a feature of Indian economy. To get around this problem the Government has decided to issue rupee denominated bonds which will, by the terms of their issue will explicitly provide for unfettered repatriation. Hopefully this will happen soon.

The "maximum amount" has been raised nearly two dozen times now, so it's meaningless to say that it hasn't been reached - it was saturated several times over (RBI wouldn't have needed to raise limits otherwise), and the current situation is simply related to Covid-19 related capital rush to safety.

A simple google search gets me these over 5 years:
Dec 2015: Euroclear presses ahead with plans to integrate Indian government bond settlement with RBI as New Delhi opens domestic debt to foreign investment
Mar 2016: RBI raises foreign ownership limits in government bonds
Jul 2017: Foreign rupee limit poses new threat to Indian high-yield bonds
Sep 2017: Foreign Ownership of Corporate Bonds Reaches the Limit
Apr 2018: Bond investors get access to $16 billion more of Indian debt
Sep 2019: India looks to ease foreign investment limits in govt bonds
And the present as stated above - deleveraging...
Apr 2020: Risk aversion: Bond sell-off brings down FPI utilisation of G-sec limits to 52%

So the larger point here is that the immediate present is in no way reflective of a sustained period of demand led increase in foreign holding limits in G-secs, state, local and corporate bonds - all Rupee denominated and traded on Indian markets under SEBI's oversight. Generally, over fiscal 2019, inflows were heavily overweight on equities relative to bond funds because of the long bull run in stocks worldwide. However, over the 5 year period, foreign holdings of Indian debt have risen both in percentage terms (from ~3% upper limit to close to 10% upper limit now) in addition to vastly a significant increase in the bond market absolute size itself. For example, as this FTSE Russell Jan 2019 report shows (page 4, chart 5) the corporate bond market in India has grown 4x between 2014-2018, and probably even more since.

[Suraj]

Why are fiscal ratings not comparative ?.. the gold standard indexes are nowhere near good at this point ., and if they are not comparative in risk assessment what are they for ?..just "ratings" ? .. i am talking about international rating agencies btw

Comparative against what ? Sovereign debt rating standards are a political game. Greece (17% unemployment, 180% debt/GDP) for example has been upgraded to AA- with a positive outlook. Spain (14% unemployment, 98% debt to GDP) is A with a stable outlook. India with lower unemployment, higher growth and lower debt/GDP sits slightly above Greece and much below Spain. All countries have some structural issues . For example, Spain has high structural unemployment that has never fallen below 8-10% even in the best of times.

[Rahul M]

Suraj, given what you say, couldn't the coupon rates be set by fiat at one level higher(say) than what the credit agencies would suggest and see if there is still demand ?

Would you recommend such a step? If not, why not ?

[Suraj]

Central banks don't normally play with it that way. They price the coupon to suit the market conditions. Mispricing leads to difficulty in conducting auctions that is one of their responsibilities, and failure to do one auction affects their ability to do subsequent ones. Transactions involve two parties after all - they need buyers who are on board with any 'different' rating regime as much as the seller is.

[RKumar]

I am surprised that INR is depreciating at this moment. To me, it seems speculative INR trading or GoI shoring up the USD/EURO.

Foreign Financial Institutions are doing clever investments by buying the bonds issued in INR. Once we cross half a trillion reserves mark, INR should appreciate against USD and trade in the range 50-60 INR. It will push pressure on the foreign reserves as Investors will try to book short term gains. So expect a lot of INR volatility.

India’s forex reserves up $3.09 bn to $479.57 bn: RBI

based on https://www.indiainfoline.com/article/n ... 060_1.html

[Uttam]

While "artificially low" (my opinion) credit rating for India has not impeded availability of debt, it has been detrimental in keeping interest rates high for govt and corporate borrowers in India. Higher interest rates in turn make project financing more expensive, which reduces the amount of investments and thus GDP growth rate.