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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • What are Stablecoins?

    stablecoins

    The US Congress (Parliament) has made another attempt to create a legislative framework for the increasingly popular stablecoins, a sort of cryptocurrency that is pegged to a particular commodity or currency.

    What are Stablecoins?

    • Stablecoins are cryptocurrencies designed to maintain a stable value, typically by being pegged to a stable asset such as the US dollar.
    • Investing in stablecoins can help mitigate market volatility because they are less susceptible to price fluctuations than other cryptocurrencies such as Bitcoin or Ethereum or any other.

    Types of stablecoins

    Fiat-backed stablecoins Backed by reserves of fiat currency held in a bank account or other secure location. Example: Tether (USDT)
    Commodity-backed stablecoins Backed by reserves of a physical commodity, such as gold or silver. Example: PAX Gold (PAXG)
    Algorithmic stablecoins Use algorithms or smart contracts to maintain a stable value. Example: Dai stablecoin (DAI)

     

    How can Stablecoin mitigate market volatility?

    Explanation
    Hedging against volatility
    • Help investors hedge against volatility and reduce their risk exposure.
    • Pegged to a stable asset, which can provide a haven during market turbulence.
    • If the value of Bitcoin or Ethereum drops suddenly, investors can move their funds into stablecoins to protect their portfolio from further losses.
    Greater flexibility in transferring funds
    • Greater flexibility and convenience compared to traditional fiat currencies.
    • Quickly and easily transferred between wallets and exchanges, making them ideal for cross-border transactions.
    • Investors take advantage of investment opportunities in other markets and avoid currency exchange fees and delays.
    Arbitrage trading
    • Used for arbitrage trading, which involves buying an asset in one market and selling it in another market for a higher price.
    • As stablecoins are pegged to a stable asset, investors can quickly move funds between exchanges without worrying about price fluctuations, making arbitrage trading easier and potentially more profitable.

     

    What are the risks?

    Explanation
    Stability of the asset
    • Stablecoins are reliant on the stability of the asset they are pegged to.
    • If the value of that asset drops, it can lead to a drop in the stablecoin’s value as well.
    • This could result in losses for investors who hold the stablecoin.
    Transparency and regulation
    • There are concerns over the transparency and regulation of stablecoin issuers.
    • This could result in a loss of trust in the stablecoin and a subsequent drop in its value.
    • There is no proper regulation and oversight.
    • There is a risk that stablecoin issuers may engage in fraudulent or unethical behaviour, which could lead to losses for investors.
    • It is important for investors to carefully assess the reputation and credibility of the stablecoin issuer before investing in a stablecoin.

     

     

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  • WTO panel rules against India in IT tariffs dispute

     

    A World Trade Organization (WTO) panel has ruled that India has violated global trading rules in a dispute with the European Union (EU), Japan, and Taiwan over import duties on IT products.

    About World Trade Organization (WTO)

    Details
    Purpose Regulate and facilitate international trade between nations
    Establishment 1995
    Headquarters Geneva, Switzerland
    Membership 164 member countries as of 2023, representing over 98% of global trade
    Goal Promote free and fair trade by negotiating and enforcing rules and agreements governing international trade
    Agreements Administers a number of agreements, including GATT, SPS Agreement, and TRIPS Agreement
    Dispute Resolution Operates a dispute settlement system to resolve conflicts between member countries
    Technical Assistance Provides technical assistance and training to help developing countries participate more effectively in international trade
    Decision-Making Body Ministerial Conference, which meets every two years
    Director-General Chief executive responsible for overseeing the organization’s operations and activities
    Criticisms Some criticize the WTO for being undemocratic, favoring developed countries, and not doing enough to promote labor and environmental standards in international trade

     

    What was the case?

    • The case involved a dispute over India’s introduction of import duties ranging from 7.5% to 20% on a wide range of IT products, including mobile phones, components, and integrated circuits.
    • The EU, Japan, and Taiwan challenged these import duties in 2019, arguing that they exceeded the maximum rate allowed under global trading rules.
    • The recent ruling by the WTO panel found that India had violated these rules and recommended that India bring its measures into conformity with its obligations.

    WTO Panel’s Ruling

    • The WTO panel has ruled that India violated global trading rules by imposing these import duties.
    • The panel recommended that India bring these measures into conformity with its obligations.
    • While the panel broadly backed the complaints against India, it rejected one of Japan’s claims that India’s customs notification lacked “predictability”.

    Implications of the ruling

    • The EU is India’s third-largest trading partner, accounting for 10.8% of total Indian trade in 2021, according to the European Commission.
    • The ruling could have implications for trade relations between India and the EU, as well as Japan and Taiwan.
    • India may be required to lower or eliminate the challenged import duties.
    • It remains to be seen whether India will appeal against the ruling.
    • If it does, the case will sit in legal purgatory since the WTO’s top appeals bench is no longer functioning due to US opposition to judge appointments.

    Conclusion

    • The panel recommended that India bring such measures into conformity with its obligations, and it remains to be seen whether India will appeal against the ruling.
    • The case highlights the importance of complying with global trading rules and the role of the WTO in resolving trade disputes between countries.

     

  • Lessons Learned: Transition To A Self-reliant Clean Energy System

    Central Idea

    • Lessons learned from the liberalization of upstream petroleum sector can guide India’s transition to a self-reliant clean energy system.

    Background

    • In 1980, then-Prime Minister Indira Gandhi took a significant step in liberalizing the upstream petroleum sector in India. This move aimed to reduce the country’s reliance on external sources for petroleum and protect it from supply shocks. However, the liberalization did not bridge the gap between domestic demand and indigenous supply.
    • In 2020, Prime Minister Narendra Modi introduced the production-linked incentive (PLI) scheme to promote investment in minerals, components, and equipment required for the generation and consumption of clean energy. This decision was driven by the strategic imperative to transition to a self-reliant clean energy system and reduce dependence on external sources of energy.

    Bridging the gap between demand and supply in the clean energy sector

    • Demand and supply gap: The liberalization of upstream petroleum did not bridge the gap between the domestic demand for petroleum and indigenous supply.
    • Capital is not enough: The clean energy sector must not presume that the availability of technical talent and capital will be enough to create a world-class hub for the manufacture of batteries, solar cells, wafers, and modules.

    Efficient Implementation of Technology in Clean Energy Sector

    • India’s oil and gas producing average: The recovery rate of oil and gas from India’s producing fields has averaged between 25-30%, while fields of comparable geology across the world have a recovery rate between 40-60%.
    • China’s dominance in clean energy value chain: China’s dominance of the clean energy value chain is because its process engineers have perfected the implementation of the several technological steps required to convert raw material into end product.

    Reduce entry barriers and improve business condition

    • India cannot compete on the size of the incentive package, and the endeavor should instead be to lower entry barriers, ease business conditions and remove the perception that India offers a high-cost operating environment.

    India’s Dependency on External Market and Two-Track Policy with China

    • India remains dependent on the external market for supplies of petroleum, but the country should desist from building a high-cost, domestic, clean energy hub that is forever dependent on subsidies.
    • India should continue with its two-track policy and strengthen its trading relationship with China.

    Conclusion

    • India can learn from the lessons of the last 40 years to transition to a self-reliant clean energy system. The country needs to focus on creating an enabling ecosystem, efficiently utilizing technology, and easing business conditions to attract international investment. India should focus on trading relationships and not build a high-cost, domestic clean energy hub dependent on subsidies.

    Mains Question

    Q. India’s clean energy sector has enormous potential for growth, however there is a gap between domestic demand and indigenous supply. What specific measures can India take to bridge this gap and emerge as global leader in renewable energy?

  • Key highlights of the Foreign Trade Policy, 2023

    foreign trade policy

    Union Minister of Commerce and Industry has launched the Foreign Trade Policy 2023.

    Foreign Trade Policy, 2023

    • The policy is dynamic and open-ended to accommodate the emerging needs of the time.
    • It aims to promote India’s overall exports, which has already crossed US$ 750 Billion.
    • The key approach to the policy is based on these 4 pillars:
    1. Incentive to Remission,
    2. Export promotion through collaboration – Exporters, States, Districts, Indian Missions,
    3. Ease of doing business, reduction in transaction cost and e-initiatives and
    4. Emerging Areas – E-Commerce Developing Districts as Export Hubs and streamlining SCOMET (Special Chemicals, Organisms, Materials, Equipment, and Technologies) Policy

    Overview of the FTP, 2023

    • FTP to provide the policy continuity and a responsive framework
    • Approach of FTP: From Incentive to Remission
    • Introduces scheme for remission of duties, taxes and govt levies on export goods
    • Digitisation of applications pertaining to FTP
    • Automatic system-based approval of FTP applications
    • Pilot introduced for cutting processing of applications related to advance authorisation to 1 day
    • Norms for recognition as Star Trading Houses eased
    • Promotes trade in Indian Rupee
    • Introduces provisions for merchanting trade
    • Dairy sector to be exempted from maintaining average export obligation * Battery electric vehicles; vertical farming equipment & green hydrogen eligible for reduced obligation under Export Promotion Capital Goods (EPCG) scheme
    • Special advance authorization scheme extended for apparel & clothing sector
    • Extends all FTP benefits to e-commerce exports
    • Value limit for exports through courier service increased from Rs 5 lakh to Rs 10 lakh per consignment
    • Focus on engaging with states & districts through Districts as Export Hubs initiative
    • Aims at streamlining export of dual use items under SCOMET policy
    • Introduces amnesty scheme for one-time settlement of default in export obligation by advance authorisation and EPCG authorisation holders
    • FTP to be dynamic and responsive to the emerging trade scenario
    • Restructuring of Department of Commerce on the anvil to make it future-ready

     

    Key highlights

    (1) Process Re-Engineering and Automation

    • The policy emphasizes export promotion and development, moving away from an incentive regime to a regime which is facilitating, based on technology interface and principles of collaboration.
    • Reduction in fee structures and IT-based schemes will make it easier for MSMEs and others to access export benefits.
    • Duty exemption schemes for export production will now be implemented through Regional Offices in a rule-based IT system environment, eliminating the need for manual interface.

    (2) Towns of Export Excellence

    • Four new towns have been designated as Towns of Export Excellence (TEE) in addition to the existing 39 towns.
    • The TEEs will have priority access to export promotion funds under the Market Access Initiative (MAI) Scheme.
    • It will be able to avail Common Service Provider (CSP) benefits for export fulfilment under the EPCG Scheme.

    (3) Recognition of Exporters

    • Exporter firms recognized with ‘status’ based on export performance will now be partners in capacity-building initiatives on a best-endeavour basis.
    • 2-star and above status holders would be encouraged to provide trade-related training based on a model curriculum to interested individuals.

    (4) Promoting Export from the Districts

    • The FTP aims at building partnerships with State governments and taking forward the Districts as Export Hubs (DEH) initiative.
    • This would promote exports at the district level and accelerate the development of grassroots trade ecosystem.

    (5) Streamlining SCOMET Policy

    • India is placing more emphasis on the “export control” regime.
    • A robust export control system in India would provide access of dual-use High end goods and technologies to Indian exporters while facilitating exports of controlled items/technologies under SCOMET from India.

     

    (6) Facilitating E-Commerce Exports

    • Various estimates suggest e-commerce export potential in the range of $200 to $300 billion by 2030.
    • FTP 2023 outlines the intent and roadmap for establishing e-commerce hubs and related elements such as payment reconciliation, book-keeping, returns policy, and export entitlements.
    • As a starting point, the consignment wise cap on E-Commerce exports through courier has been raised from ₹5Lakh to ₹10 Lakh in the FTP 2023.

    (7) Facilitation under Export Promotion of Capital Goods (EPCG) Scheme

    The government has made several changes to the Foreign Trade Policy, including:

    • Adding PM MITRA scheme for textile and apparel parks to EPCG’s Common Service Provider Scheme
    • Exempting dairy sector from maintaining Average Export Obligation
    • Adding green technologies such as BEVs, vertical farming equipment, and rainwater harvesting to EPCG’s reduced Export Obligation requirement.

    (8) Facilitation under Advance authorization Scheme

    • DTA (Domestic Tariff Area) units can access the Advance Authorization Scheme for duty-free import of raw materials for manufacturing export items, and it can be used for domestic and export production.
    • The Special Advance Authorization Scheme has been extended to the Apparel and Clothing sector to facilitate prompt execution of export orders.
    • The Self-Ratification Scheme for fixation of Input-Output Norms has been extended to 2-star and above status holders.

    (9) Merchanting trade

    • The FTP 2023 has introduced provisions for merchanting trade, which allows the shipment of goods from one foreign country to another foreign country without touching Indian ports, involving an Indian intermediary.
    • This will be subject to compliance with RBI guidelines, and it won’t be applicable for goods/items classified in the CITES and SCOMET list.
    • This is expected to allow Indian entrepreneurs to convert certain places into major merchanting hubs.

    (10) Amnesty Scheme

    • The government is introducing a special one-time Amnesty Scheme under the FTP 2023 to address default on Export Obligations and provide relief to exporters who have been unable to meet their obligations under EPCG and Advance Authorizations.
    • All pending cases of default in meeting Export Obligation (EO) of authorizations can be regularized on payment of all customs duties that were exempted in proportion to unfulfilled Export Obligation.
    • The interest payable is capped at 100% of these exempted duties under this scheme, and no interest is payable on the portion of Additional Customs Duty and Special Additional Customs Duty.

     

  • Competition (Amendment) Bill passed in Lok Sabha

    The Lok Sabha passed the Competition (Amendment) Bill, 2023, which could pose new challenges for global technology companies.

    About Competition Act, 2022

    • The Competition Act, 2002 was passed by the Parliament in the year 2002, to which the President accorded assent in January, 2003.
    • It was subsequently amended by the Competition (Amendment) Act, 2007.
    • In accordance with the provisions of the Amendment Act, the Competition Commission of India (CCI) and the Competition Appellate Tribunal (COMPAT) have been established.
    • The CCI is now fully functional with a Chairperson and six members.

    Changes brought by the Amendment

    (1) Penal powers to CCI

    • It grants the CCI the authority to penalize entities found engaging in anti-competitive behavior based on their global turnover, rather than just their annual domestic turnover, which was the case previously.

    (2) Turnover Definition

    • The definition of “turnover” has been a widely debated subject in the competition law landscape.
    • The Supreme Court had previously fixed the criteria for determining turnover in competition law contraventions, holding that it should be the “relevant turnover,” i.e., turnover derived from the sales of goods or services.

    (3) Mergers and acquisition

    • The CCI will have greater authority in mergers and acquisitions worth more than Rs 2,000 crore.
    • Additionally, the time limit for approval of mergers and acquisitions has been reduced from 210 days to 150 days.

    Impact on Tech Companies

    • While the provision on global turnover will not be exclusively applicable to tech companies, they are likely to be the most affected by it, given the nature of their business that operates across geographies.
    • Typically, the revenue earned from these companies’ India operations is much smaller than their income in other regions, such as the US and Europe.

  • Prices of Essential Medicines set to hike

    medicine

    Prices of 384 essential drugs and over 1,000 formulations are set to see a hike of over 11%, due to a sharp rise in the Wholesale Price Index (WPI).

    Implications for customers

    • Annual hikes in the prices of drugs listed in the National List of Essential Medicines (NLEM) are based on the WPI.
    • The price surge will mean that consumers have to pay more for routine and essential drugs, including painkillers, anti-infection drugs, cardiac drugs, and antibiotics.

    What are Essential Medicines?

    • As per the World Health Organisation (WHO), Essential Medicines are those that satisfy the priority healthcare needs of the population.
    • Ministry of Health and Family Welfare hence prepared and released the first National List of Essential Medicines (NLEM) of India in 1996 consisting of 279 medicines.
    • The list is made with consideration to disease prevalence, efficacy, safety and comparative cost-effectiveness of the medicines.
    • Such medicines are intended to be available in adequate amounts, in appropriate dosage forms and strengths with assured quality.
    • They should be available in such a way that an individual or community can afford.

    NLEM in India

    • Drugs listed under NLEM — also known as scheduled drugs — will be cheaper because the National Pharmaceutical Pricing Authority (NPPA) caps medicine prices and changes only based on wholesale price index-based inflation.
    • The list includes anti-infectives medicines to treat diabetes such as insulin — HIV, tuberculosis, cancer, contraceptives, hormonal medicines and anaesthetics.
    • They account for 17-18 per cent of the estimated Rs 1.6-trillion domestic pharmaceutical market.
    • Companies selling non-scheduled drugs can hike prices by up to 10 per cent every year.
    • Typically, once NLEM is released, the department of pharmaceuticals under the ministry of chemicals and fertilisers adds them in the Drug Price Control Order, after which NPPA fixes the price.

    Who regulates Drugs prices?

    • The NPPA was set up in 1997 to fix/revise prices of controlled bulk drugs and formulations and to enforce price and availability of the medicines in the country, under the Drugs (Prices Control) Order, 1995-2013.
    • Its mandate is:
    1. To implement and enforce the provisions of the DPCO in accordance with the powers delegated to it
    2. To deal with all legal matters arising out of the decisions of the NPPA
    3. To monitor the availability of drugs, identify shortages and to take remedial steps
    • The NPPA is also mandated to collect/maintain data on production, exports and imports, market share of individual companies, profitability of companies etc., for bulk drugs and formulations and undertake and/ or sponsor relevant studies in respect of pricing of drugs/ pharmaceuticals.

    How does the pricing mechanism work?

    • Prices of Scheduled Drugs are allowed an increase each year by the drug regulator in line with the Wholesale Price Index (WPI) and the annual change is controlled and rarely crosses 5%.
    • But the pharmaceutical players pointed out that over the past few years, input costs have flared up.
    • The hike has been a long-standing demand by the pharma industry lobby.
    • All medicines under the NLEM are under price regulation.

     

    Try this MCQ

    Q. Which of the following is not a mandate of the National Pharmaceutical Pricing Authority (NPPA)?

    A) Fixing and revising prices of controlled bulk drugs and formulations

    B) Enforcing price and availability of medicines in the country

    C) Monitoring the availability of drugs and taking remedial steps

    D) Regulating the import and export of pharmaceutical products

     

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  • In news: Liberalised Remittance Scheme (LRS)

    Central idea: The Reserve Bank of India (RBI) is being asked to monitor card spend under the Liberalised Remittance Scheme (LRS).

    Liberalised Remittance Scheme (LRS)

    • LRS is a facility provided by the Reserve Bank of India (RBI) to resident individuals to remit funds abroad for permitted current or capital account transactions or a combination of both.
    • The scheme was introduced in 2004 and has been periodically reviewed and revised by the RBI.
    • Under the scheme, resident individuals can remit up to a certain amount in a financial year for permissible transactions including education, travel, medical treatment, gifts, and investments in equity and debt securities, among others.
    • The limit for LRS is currently set at USD 250,000 per financial year.

    Eligibility for LRS

    • LRS is open to everyone including non-residents, NRIs, persons of Indian origin (PIOs), foreign citizens with PIO status and foreign nationals of Indian origin.
    • The Scheme is NOT available to corporations, partnership firms, Hindu Undivided Family (HUF), Trusts etc.

    Benefits provided by LRS

    • LRS is an easy process that anyone can use to transfer money between two countries.
    • It’s especially useful for businesses because they can use it to transfer funds to India, and investors can receive their investments back home.
    • LRS also has some added benefits, like fast transfer timing and no issues with exchange rates.

     

     

  • Return of the Net Neutrality debate in India

    net neutrality

    Since November 2022, India’s Cellular Operators Association (COAI) has been requesting that platforms like YouTube and WhatsApp pay a share of revenue to offset network costs, reigniting the net neutrality debate.

    What is Net Neutrality?

    • Net Neutrality is the concept that all traffic on the internet should be treated equally, without discrimination or preference given to certain types of content, websites, or users.
    • This means that internet service providers (ISPs) should not be allowed to block, slow down, or prioritize traffic based on the source, destination, or content of that traffic.
    • Net Neutrality is considered important for ensuring a level playing field for all internet users and promoting innovation, competition, and freedom of expression online.
    • It has been a subject of debate and regulatory action in many countries, including India, the United States, and the European Union.

    Features of Net Neutrality

    The following are some of the features of net neutrality:

    • Non-discrimination: All data should be treated equally, and internet service providers (ISPs) should not discriminate or prioritize any type of content, application, service, or device based on its source, destination, or ownership.
    • Transparency: ISPs should provide customers with clear and accurate information about their internet services, including their network management practices, terms of service, and fees.
    • No blocking: ISPs should not block or censor lawful content, applications, services, or devices that customers want to access, use, send, receive, or offer on the internet.
    • No throttling: ISPs should not intentionally slow down or degrade the quality of any lawful content, application, service, or device that customers want to access, use, send, receive, or offer on the internet.
    • No paid prioritization: ISPs should not offer faster or better access to any content, application, service, or device in exchange for payment or other consideration from content providers, developers, or users.
    • Competition: Net neutrality promotes competition among ISPs by preventing them from using their control over access to the internet to favor their own content, applications, services, or devices or those of their partners, affiliates, or subsidiaries over those of their competitors.

    Why in news?   

    Ans. BIF responds to COAI’s demands

    • The Broadband India Forum (BIF), which represents Internet firms such as Meta and Google, responded to the COAI’s demands by refuting them.
    • The COAI’s argument that the current demand has nothing to do with Net neutrality was contested by the BIF.
    • The COAI argued that Net neutrality pertains to the non-discriminatory treatment of content that has no nexus to the usage fee issue.

    Arguments for and against the usage fee

    • Net neutrality activists and content providers argue that imposing a usage fee, even on a limited number of large players, would be a distortion of the Internet’s architecture.
    • They contend that content providers and telecom operators enjoy a symbiotic relationship without charging each other.
    • On the other hand, the COAI argues that a network fee is not related to Net neutrality and suggests that the government reduce spectrum fees and support telecom companies with the Universal Service Obligation Fund (USOF).
    • Worldwide, telecom operators in the European Union are also demanding similar usage fees from content providers.

    TRAI ruling and the Unified License

    • In 2016, the Telecom Regulatory Authority of India (TRAI) ruled in favour of Net neutrality, which requires that all traffic on an Internet network be treated equally.
    • In 2018, the Department of Telecommunications embedded the net neutrality concept into the Unified License, which binds all telecom operators and Internet providers.

     

     

  • Rise of the Environmental, Social and Governance (ESG) Regulations

    esg

    Central idea: Regulators and corporations worldwide now measure businesses on ESG criteria. ESG criteria is crucial for investors to assess a company’s risk profile accurately. India is still in the nascent stage of ESG laws and regulations.

    What is ESG?

    • ESG Regulations are a set of standards used by investors to evaluate a company’s environmental and social impact, as well as its corporate governance practices.
    • They require companies to be transparent about their environmental and social performance, as well as their governance structure.
    • ESG factors are increasingly being used by investors to make investment decisions, and ESG ratings are becoming an important metric for companies seeking to attract investment.
    • The ESG regulations differ by country, but many require companies to disclose information on environmental and social issues, as well as on their governance practices.
    • ESG regulations are becoming increasingly important as investors and consumers demand greater transparency and accountability from companies.Top of FormBottom of Form

    Features of ESG Mechanism

    • Environmental factors: These include a company’s impact on climate change, greenhouse gas emissions, pollution, waste management, and natural resource conservation.
    • Social factors: These include a company’s impact on society, such as labor practices, human rights, community relations, customer satisfaction, and product safety.
    • Governance factors: These include a company’s management structure, board diversity, executive compensation, shareholder rights, and business ethics.
    • ESG ratings and metrics: Companies are evaluated based on ESG ratings and metrics, which can help investors assess a company’s overall sustainability and ethical impact.
    • ESG investing: ESG investing refers to investing in companies that meet certain ESG criteria, with the aim of generating financial returns while also having a positive impact on society and the environment.
    • ESG reporting: Many companies are now required to disclose their ESG performance and report on their sustainability practices, in order to meet regulatory requirements and respond to growing investor demand for transparency and accountability.Top of FormBottom of Form

    Corporate Social Responsibility: ESG-like mechanism in India

    • India has a robust corporate social responsibility (CSR) policy that mandates that corporations engage in initiatives that contribute to the welfare of society.
    • This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013.

    How ESG differs from CSR?

    • ESG regulations differ from CSR regulations in their process and impact
    • For example, the U.K. Modern Slavery Act requires companies with business in the U.K. and with annual sales of more than £36 million to publish their efforts in identifying and analysing the risks of human trafficking, child labour and debt bondage in their supply chain.
    • It seeks to establish internal accountability procedures, evaluate supplier compliance, and train supply chain managers regarding these issues
    • The EU’s Sustainable Finance Disclosure Regulation requires financial market participants to disclose how they have integrated sustainability risks into their investment decision-making processes
    • There are scores of such regulations at the state, national and transnational level.

    Why is ESG relevant in India?

    Ans. Existing mechanisms serve ESG purpose

    • India has long had a number of laws and bodies regarding environmental, social and governance issues, including the Environment Protection Act of 1986.
    • It has quasi-judicial organisations such as the National Green Tribunal, a range of labour codes and laws governing employee engagement and corporate governance practices.
    • These initiatives established guidelines that emphasise monitoring, quantification and disclosure, akin to ESG requirements found in other parts of the world.

    ESG for Indian companies

    Here are some key considerations for Indian companies in relation to ESG:

    • Compliance with global ESG regulations: Compliance in the US, UK, EU and elsewhere is critical for Indian companies to take full advantage of the growing decoupling from China and play a more prominent role in global supply chains and the global marketplace overall.
    • Due diligence: This will play a key role in ESG risk management, which means going beyond questionnaires and conducting deeper assessments that may include looking at company records, interviewing former employees, and making discreet visits to observe operations to ensure that measures to comply with international ESG standards are in effect.
    • Revamp organizations: ESG due diligence should be supported within the company with detailed procedures for assessing risks and controls for assuring that no corners are cut. Companies that wish to maximise their opportunities in the global economy need to embrace these new requirements and adjust their organisations accordingly.

    Way forward

    • Encouraging and incentivizing companies: To adopt ESG practices voluntarily through education, training and awareness-raising programs.
    • Developing national guidelines and standards for ESG: To promote consistency and comparability of ESG performance data among Indian companies.
    • Tailor-made Policy catering to domestic needs: Implementing ESG regulations that are tailored to the specific needs and challenges of Indian companies, with a focus on promoting transparency, accountability and stakeholder engagement.
    • Facilitating access to capital for companies that demonstrate strong ESG performance: By establishing ESG-focused investment funds and credit facilities.
    • Promoting international collaboration and harmonization of ESG standards: To facilitate global trade and investment while ensuring that ESG risks are appropriately addressed.

    Conclusion

    • Overall, a comprehensive and collaborative approach is needed to ensure that Indian companies can effectively manage ESG risks and opportunities and contribute to sustainable development.

     

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  • What is Angel Tax?

    angel

    Central idea: The article provides an overview of the angel tax provisions in the Finance Bill, which were introduced in the Budget. It highlights the concerns raised by the start-up community regarding the impact of these provisions on their operations.

    Angel Investment

    • An angel investor is an individual who provides financial backing to early-stage startups or entrepreneurs, typically in exchange for equity in the company.
    • Angel investors are typically high-net-worth individuals who invest their own personal funds, rather than investing on behalf of a firm or institution.
    • Features of Angel Investing:
    1. Early-stage funding
    2. Equity investment
    3. High-risk, high-reward
    4. Active involvement
    5. Personal investment
    6. Flexible terms
    7. Shorter investment horizon

     

    What is Angel Tax?

    • Referred to as Angel Tax, this rule is described in Section 56(2)(viib) of the Income Tax Act, 1961.
    • Essentially it’s a tax on capital receipts, unique to India in the global context.
    • This clause was inserted into the act in 2012 to prevent laundering of black money, round-tripping via investments with a large premium into unlisted companies.
    • The tax covers investment in any private business entity, but only in 2016 was it applied to startups.

    Why was angel tax introduced?

    • The complicated nature of VC fundraising with offshore entities, multiple limited partners and blind pools is contentious.
    • There has been some element of money laundering or round-tripping under guise.

    Details of its levy

    • The Angel Tax is being levied on startups at 9% on net investments in excess of the fair market value.
    • For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption.
    • However, the investor must have a net worth of ₹2 crores or an income of more than ₹25 Lakh in the past 3 fiscal years.

    Startups under scrutiny

    • As more and more new-age tech startups started raising VC funding, they came under the IT department scrutiny.
    • These funding deals often saw investors paying a premium above the face value or the fair market value of securities, and therefore were taxed as income for the startup.
    • Between 2016 and 2019, startups urged the government to add exceptions that would allow them to be exempt from the Angel Tax.

    Which startups are exempted?

    • There is a clear provision that says that start-ups which are recognized by DPIIT are out of the proposal’s purview.
    • The start-up recognition process is also very simple where any applicant gets it automatically.
    • However, the key condition for exemption is that the aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of share does not exceed INR 25 Cr.

    Concerns raised by startup

    • Compliance burden: Even beyond the issue of taxation, the compliance burden on startups will potentially increase significantly under the new rules.
    • Persisting slowdown: The timing of this potential tax is most worrying since it coincides with the ongoing startup funding slowdown.
    • Fear of off-shoring: Entrepreneurs and investors are concerned that applying strict taxes on capital receipts without adequate exceptions will lead to startups moving overseas.

    Back2Basics: Startups in India

    • Startups are young companies founded to develop a unique product or service, bring it to market and make it irresistible and irreplaceable for customers.
    • In India, start-up should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
    • Turnover should be less than INR 100 Crores in any of the previous fiscal years.
    • An entity shall be considered a Start-up up to 10 years from the date of its incorporation.
    • The Start-up should be working towards innovation/ improvement of existing products, services, and processes and should have the potential to generate employment/ create wealth.
    • An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”.

     

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