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Dubai deals under investigation

Akhilesh Bhargava

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Dubai

Dubai has been a favourite destination for parking of illegal funds of Indians, who may have evaded various laws, including FEMA and the Income Tax Act. With a zero tax regime and a very liberal banking system, with few questions asked regarding funds inflow and outflow, it has been a tax haven of sorts, which has been patronised not just by South East nations like India, but by the nearby African, Central Asian and European nations too. As far as India is concerned, Dubai has had a notorious past of permitting a free run to criminals and tax evaders from India, even though due to international pressures in recent years, curbs have been imposed. It is for these reasons and the attraction of Dubai as an entrepot, that Indians have invested heavily in real estate in Dubai. Between 2013 to 2017, Indians have invested about Rs.100,000 crores, in real estate in Dubai. In the first three months of 2018 itself, the amount invested by Indians in real estate in Dubai, has been Rs.5000 crores.

It has been a common global practice for individuals and corporates to park money abroad, either to save on taxes or to avail of the benefits of residence in an attractive nation. American corporates itself are said to hold overseas assets worth USD 1500bn, seeking better tax and investment options. Such hoarding of funds is generally done in nations where taxes are nil/low and remittance laws are liberal, such that funds can flow in and out with ease. While such stashing of funds abroad by American corporates is reported to be generally legal, that has not been the case of India. Till about a decade ago, as a general rule, Indians could not buy assets abroad, because our restricting forex laws did not permit such remittances. Only those who had earnings in foreign exchange, by way of exports, could retain part of it abroad and invest it in assets. Even the regulations permitting Indian corporates to invest abroad were not liberal, with severe restrictions and conditions thereon.

It is these restrictive/rigid forex laws and oppressive tax laws, that gave rise to a culture of tax evasion and illegal parking of funds, in undisclosed assets abroad, in violation of India’s tax and FEMA laws. This practice of ‘evade tax and remit’, was encouraged by tax havens like Switzerland, whose very economies depended on the management of such illegal remittances into their nations. But in recent times, these nations too have been forced to share information with countries and overseas investments have come under the radar of tax and enforcement authorities, as in India.

The news is that the Indian Income Tax Department is probing the purchase of properties in Dubai by 7500 Indians, to check whether these have been out of legitimate disclosed sources and are not otherwise. In case these are funded by illegal hawala channels, then tax penalty and prosecution of these Indians will be harsh, apart from action against them by the ED and the money laundering authorities. With such action, the illegal investments into Dubai, emanating from India will certainly be reduced to a trickle.

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RATING AGENCIES HAVE BEEN INCOMPETENT AND NEGLIGENT

Akhilesh Bhargava

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SEBI

The giant ILFS scam was not an overnite creation. It started in 2012 and continued for years, becoming bigger and bigger with each passing year. It is the stark negligence of the credit rating agencies (CRAs), that has been responsible for the ILFS scam, ballooning to such a big one, whose very size in terms of loans taken, still remains a mystrey. Had the CRAs exercised just ordinary vigilance and had not shut their eyes to the most obvious signals of distress and default by ILFS, the scam would have been nipped in the bud, much earlier in the day and its size would have been a fraction of what it is today. There were obvious signals of losses and financial fatigue in the ILFS group, starting from 2012 itself. These very apparent signals that the CRAs ignored were that the liabilities of the ILFS group increased year after year, with no matching increase in the assets, its disputes over claims with the likes of NHAI kept increasing and remained unresolved, its holding company had started incurring losses and cashflows were receding, the support of its investor shareholders like LIC, SBI etc. on which basis ILFS was given AAA ratings, was clearly missing, that in the June 2018 board meeting of ILFS, the directors warned these shareholders that if they did not immediately infuse an additional equity of Rs.4500 crores in ILFS, its collapse was imminent and yet right upto Aug.2018, these rating agencies gave a AAA rating to ILFS.

If the CRAs were sleeping and gave no downgrade ratings/warnings to the lenders to ILFS, they were also very incompetent in their job. They failed to spot that ILFS had borrowed far in excess of its repayment capability, its liquidity was shrinking rapidly, it was incurring more and more losses by padding up project costs (called gold plating), its own investment in projects was actually NIL and that it had indulged in money laundering and siphoning of funds. The CRAs were also very willingly hoodwinked by the smart/oblique Ravi Parthasarathy and his team of highly paid executives and were also overpowered by the gang of top notch very well connected, retired bureaucrats at his disposal. The rating agencies thus were clearly negligent and incompetent, who compromised their integrity, whether intentionally or otherwise and are now being questioned for their failure, by the likes of SFIO.

The CRAs in India are regulated/governed by SEBI, and unsurprisingly SEBI has got into action only after the loot took place. SEBI too is guilty of being reactive and not proactive, that enabled the negligence of the CRAs. SEBI has now tightened the rating agency regulations, primarily entailing more and more disclosures, particularly in respect of liquidity position, asset-liability mismatches, rationale for any expectations of support from the promoters, adequacy of cashflows for servicing maturing debt obligations, and the extent of consolidation in the case of subsidiaries to understand the overall financial position of a company.

These additional SEBI requirements are anyway a must and it is surprising that mandatory regulations are needed to enforce them. These should have anyway been a part of routine rating procedures and methodology. Rating is not a tick in the box job. It needs an intense vigilance/alertness to look out for early warning signals, which was missing in the case of ILFS. Higher disclosure norms are no substitute for basic human common sense/due diligence that CRAs failed to exercise in the case of ILFS and that needs a detailed investigation.

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Demonetisation saved collapse of Indian economy: S Gurumurthy

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Gurumurthy

New Delhi | Ahead of next week’s crucial board meeting of RBI, the central bank’s independent director and RSS ideologue S Gurumurthy Thursday made a case for calibration of its massive Rs 9.6 lakh crore reserves, saying no central bank in the world maintains such high levels of surplus.

Gurumurthy, who was appointed to the board of RBI a few months back, said the capital adequacy ratio prescribed in India is 1 per cent higher than the global Basel norms. He also pitched for easing lending norms for small and medium enterprises, which account for 50 per cent of the country’s GDP.

In his first public comments since the spat between the RBI and the Finance Ministry over a range of issues came out in the open, Gurumurthy said the stand-off “is not a happy thing at all”. The RBI’s board meeting is scheduled to take place on Monday where the issues raised by the government, including easing of PCA norms, cutting size of reserves and enhancing credit to MSMEs, are likely to come up for discussion.

Praising the shock demonetisation of old Rs 500 and Rs 1,000 notes in November 2016, he said the Indian economy would have collapsed under the weight of high denomination currency notes which had risen to Rs 4.8 lakh crore in just 18 months and was being funnelled to real estate and gold.

On the issue of capital framework for RBI, he said two different studies have put the adequate size of reserve that the central bank must maintain to guard against default risk at 12 per cent and 18.76 per cent. However, the RBI currently has reserve of 27-28 per cent, which may have further gone up due to the recent depreciation in the value of rupee.

“The appreciation in the value of the dollar is the reserve of the Reserve Bank. You bought dollar at 42-45, and it is now 70. Just like when you buy some shares and the share values go up, and you take the appreciation as your reserve, this is the reserve.

“You cannot say, come on it has appreciated so much, give me that money. I don’t think the government is asking for that. As my understanding goes, the government is only asking for a formulation of a policy as to how much reserve the central bank must have. Most central banks don’t have reserves of this kind at all, only RBI has these kinds of reserves,” he said. Gurumurthy was delivering a lecture on ‘State of the Economy: India and the World’ at the Vivekananda International Foundation (VIF) here.

Stating that the stand-off between the RBI and government “is not a happy thing at all”, he indicated that differences could be a result of considering only the American system as the perfect ecosystem. “But I think an alternative is necessary and exists also. That is part of an overall correction of the Indian mind,” he said.

On easing of Prompt Corrective Action (PCA) framework, he said there has been certain revisions of norms recently. “If capital adequacy is the only ground, then much of this problem won’t be there. But there is capital adequacy-plus grounds on which this issue is there. That is the matter of dispute between the government and RBI,” he said.

The PCA framework kicks in when banks breach any of the three key regulatory trigger points — namely capital to risk weighted assets ratio, net non-performing assets (NPA) and return on assets (RoA).

Of the 21 state-owned banks, 11 are under the PCA framework. These are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce, Dena Bank and Bank of Maharashtra. With regard to Basel III norms on capital adequacy, he said the BIS prescribes these for only internationally active banks.

“But banks which are not internationally active, need not conform to what (they) say. The universal banks need not conform to what (they) say. We don’t have any commercial banks. We have only universal banks because our banks do term lending. But still the same Basel norms are imposed,” he said.

In India, for both internationally active and domestic banks it is 9 per cent, he said. “We are doing more than what Basel wants and so the banks have less money to lend. These are all the things on which there is no discourse in India,” he noted. There are only four internationally active banks in India, he said, adding all others are domestic lenders. “They need not have 8 per cent capital. They are forced into having 9 per cent capital. Because some people think the IMF feels happy if we have 9 per cent capital,” he said.

Making a case for restricting imports, Gurumurthy said the government has been following an utterly wrong policy of having capital goods import exceeding oil imports. “We need to go in for heavy import restrictions. We have got to cut down the current account deficit and trade deficit in the next one year. Otherwise we will continue to accentuate this problem. On this, all the institutions need to work together,” he said.

Backing demand for enhancing lending to MSMEs, he said this sector has been hit by both demonetization and GST and has been starved of credit. “If government says (this sector) should be funded, the media says the government is working against the independence of the RBI. A sector which is driving the lifeline of India, which constitutes 70 per cent of exports of India, 90 per cent of employment and 50 per cent of GDP of India that is starved of money, these are the issues,” he said.

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Rupee rises 10 paise against US dollar to 71.87

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Rupee

Mumbai | The rupee firmed 10 paise to 71.87 against the US dollar Friday on increased selling of the US currency by exporters and banks.

Besides, weakness in the greenback against some currencies overseas, increased foreign fund inflows and a higher opening of domestic equities supported the rupee, traders said. Foreign funds bought shares worth a net of Rs 2,043.06 crore Thursday, as per provisional data. At the interbank forex market, the rupee opened higher at 71.94, and advanced 10 paise to 71.87 against the US dollar.

The rupee had vaulted 34 paise to close at a two-month high of 71.97 against the US dollar Thursday on robust foreign fund inflows amid low crude oil prices. Meanwhile, the benchmark BSE Sensex rose 96.29 points, or 0.28 percent, to 35,356.83 in early session Friday.

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