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GS Paper: GS3-14.Investment models

  • RBI finalises Omnibus Framework for SROs in regulated entities

    Why in the news? 

    • The Reserve Bank of India (RBI) on Thursday said it had finalised the Omnibus Framework for recognising Self-Regulatory Organisations (SRO) for its Regulated Entities.

    The key features of the Self-Regulatory Organization (SRO)- 

    • Omnibus Framework: The RBI has finalized an omnibus framework for recognizing Self-Regulatory Organizations (SROs) for regulated entities. This framework contains broad parameters such as objectives, responsibilities, eligibility criteria, governance standards, application process, and other basic conditions for granting recognition.
    • Sector-Specific Guidelines: Sector-specific guidelines will be issued separately by the respective departments of the Reserve Bank for each sector where an SRO is intended to be set up. This ensures that the SROs cater to the specific needs and requirements of their respective sectors.
    • Draft Framework and Public Consultation: A draft framework for SROs was issued for public comments, and based on the examination of inputs received, the omnibus framework has been finalized. This indicates a consultative approach in the development of the SRO framework.
    • Credibility and Responsibility: SROs are expected to operate with credibility, objectivity, and responsibility under the oversight of the regulator. They aim to improve regulatory compliance for the healthy and sustainable development of the sectors they cater to.
    • Transparency and Independence: SROs are expected to operate with transparency, professionalism, and independence to foster greater confidence in the integrity of the sector. Compliance with the highest standards of governance is a prerequisite for an effective SRO.

    The significance of Self-Regulatory Organizations (SROs)-

    • Enhanced Regulatory Compliance: SROs establish and enforce industry standards and best practices, leading to improved regulatory compliance among member organizations. By setting clear guidelines and monitoring adherence to them, SROs help regulated entities maintain compliance with relevant laws and regulations.
    • Industry Integrity and Confidence: SROs play a crucial role in maintaining and enhancing industry integrity and public confidence. By promoting transparency, professionalism, and ethical conduct, SROs contribute to building trust among stakeholders, including customers, investors, and regulatory authorities.
    • Tailored Regulation: SROs can develop sector-specific regulations and standards that are tailored to the unique characteristics and challenges of their respective industries. This flexibility allows SROs to address industry-specific issues effectively, leading to more efficient regulation.
    • Effective Self-Regulation: SROs enable industry participants to self-regulate by collaboratively developing and enforcing rules and standards. This approach can often be more responsive and adaptable than traditional government regulation, as SROs can quickly respond to emerging risks and market developments.
    • Reduced Regulatory Burden: SROs can help alleviate the regulatory burden on government agencies by taking on certain regulatory functions. By delegating responsibilities such as rule-making, monitoring, and enforcement to SROs, regulators can focus their resources on overseeing broader market activities and addressing systemic risks.
    • Innovation and Growth: SROs can foster innovation and growth within their industries by creating a supportive regulatory environment. By providing guidance on emerging technologies and business models, SROs can encourage innovation while ensuring that it aligns with regulatory requirements and consumer protection standards.
    • Expertise and Knowledge Sharing: SROs serve as repositories of industry expertise and knowledge, allowing members to benefit from collective insights and experiences. Through networking events, training programs, and knowledge-sharing initiatives, SROs facilitate collaboration and learning among industry participants.

    Conclusion-

    Self-Regulatory Organizations (SROs) enhance compliance, integrity, and tailored regulation. They enable effective self-regulation, reduce regulatory burden, foster innovation, and facilitate expertise sharing, ensuring sustainable industry growth and integrity.

  • Centre seeks to ease Angel Tax Provisions

    Central Idea

    • The government has introduced revisions to the angel tax provisions that were initially implemented in this year’s Budget, primarily targeting investments by non-resident investors into startups at a premium over their fair market value.

    Key changes introduced

    • The Central Board of Direct Taxes issued a notification, amending Rule 11UA under the Income Tax Act, incorporating changes to the draft norms released earlier.
    • Five distinct valuation methods for shares have been introduced, accompanied by a 10% tolerance allowance for deviations from accepted share valuations.
    • These changes aim to provide some relief to prospective foreign investors interested in Indian startups.

     

    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.

  • SEBI to introduce One-Hour Trade Settlement

    Central Idea

    • SEBI aims to implement a One-Hour trade Settlement by March 2024.
    • Additionally, an Application Supported by Blocked Amount (ASBA)-like facility for secondary market trading is anticipated to launch in January 2024.

    Do you know?

    India is the first jurisdiction in the globe that has moved to T+1 settlement (trade plus one day).  We are now talking about one-hour settlement and that will be a stepping-stone to instantaneous settlement.

    Understanding Trade Settlement

    • Trade settlement involves the exchange of funds and securities on the settlement date.
    • It is considered complete when purchased securities are delivered to the buyer, and the seller receives the funds.
    • India transitioned to a T+1 settlement cycle earlier this year, facilitating faster fund transfers, share deliveries, and operational efficiency.

    SEBI’s Stance

    • SEBI believes that achieving instantaneous trade settlement will take additional time due to necessary technology development.
    • Therefore, SEBI plans to implement a one-hour trade settlement before the instantaneous settlement.
    • SEBI expects instantaneous trade settlement to be launched by the end of 2024.

    Benefits of One-Hour Trade Settlement

    • In the current T+1 settlement cycle, the seller receives funds in their account the day after a trade.
    • With one-hour settlement, the seller would receive funds within an hour of selling shares, and the buyer would have shares in their demat account within an hour.

    Back2Basics: T+1 Settlement Cycle

    • The T+1 settlement cycle means that trade-related settlements must be done within a day, or 24 hours, of the completion of a transaction.
    • For example, under T+1, if a customer bought shares on Wednesday, they would be credited to the customer’s demat account on Thursday.
    • This is different from T+2, where they will be settled on Friday.
    • As many as 256 large-cap and top mid-cap stocks, including Nifty and Sensex stocks, come under the T+1 settlement.
    • Until 2001, stock markets had a weekly settlement system.
    • The markets then moved to a rolling settlement system of T+3, and then to T+2 in 2003.
    • In 2020, Sebi deferred the plan to halve the trade settlement cycle to one day (T+1) following opposition from foreign investors.

  • SEBI’s Amendments to boost REITs and InvITs

    Central Idea

    • The Securities and Exchange Board of India (SEBI) has recently approved crucial changes to the regulations governing real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), aimed at enhancing their appeal to investors.
    • These investment vehicles function similarly to mutual funds, pooling capital to invest in real estate or infrastructure projects.

    What are REITs and InvITs?

    Real Estate Investment Trusts (REITs) Infrastructure Investment Trusts (InvITs)
    Structure Investment trusts owning real estate properties Investment trusts owning revenue-generating infrastructure projects
    Regulation Regulated by SEBI Regulated by SEBI
    Assets Commercial real estate properties (no residential) Operational infrastructure projects
    Units Units issued to investors, traded on stock exchanges Units issued to investors, traded on stock exchanges
    Distribution Mandatory distribution of a significant portion of income as dividends Mandatory distribution of a certain percentage of cash flows as dividends
    Tax Benefits (Dividends) Dividend distribution exempt from DDT Dividend distribution exempt from DDT
    Taxation (Investor’s Dividends) Taxable as per investor’s income tax slab Taxable as per investor’s income tax slab
    Asset Focus Commercial properties: office buildings, malls, etc. Operational infrastructure projects
    Purpose Income generation and capital appreciation Income generation and capital appreciation
    Project Type Income-generating properties Operational brownfield projects
    Examples in India Embassy Office Parks REIT, Mindspace Business Parks REIT IndiGrid Trust, IRB InvIT Fund, Sterlite Power Grid Ventures InvIT

     

    Importance of REITs and InvITs

    • Investment Pooling: REITs and InvITs operate as investment pooling vehicles, allowing sponsors to invest in real estate or infrastructure projects.
    • Affordable Ownership: REITs offer retail investors access to income-generating real estate properties that would otherwise be unaffordable.
    • Direct Investment: InvITs enable both individual and institutional investors to directly invest in infrastructure projects, spanning transport, energy, and communication sectors.

    Performance of REITs and InvITs

    • Growing Popularity: Since their launch in 2019, REITs have gained traction, demonstrating resilience during challenges such as the pandemic.
    • Rising Interest: InvITs have a broader scope, with multiple listings, including IRB InvIT Fund and Embassy Office Parks Reit.
    • Assets Under Management: As of the beginning of 2023, REITs and InvITs registered with Sebi managed assets exceeding ₹3.5 trillion.

    Sebi’s Amendments Explained

    • Unit Holder Nomination Rights: Sebi has granted board nomination rights to unit holders of InvITs and REITs, allowing them greater influence.
    • Minimum Unit Holding Change: The minimum unit holding requirement for sponsors has been revised, enhancing flexibility.
    • “Self-Sponsored Investment Managers”: Sebi introduced the concept of self-sponsored investment managers, enabling them to assume Reit sponsor responsibilities.

    Importance of the Changes

    • Enhanced Corporate Governance: These amendments are designed to bolster corporate governance and streamline the functioning of InvITs and REITs.
    • Retail Unit Holder Rights: The changes empower retail unit holders by giving them a voice and ensuring accountability through the Stewardship Code.
    • Sponsor Commitment: Sponsors are now required to maintain a minimum number of units throughout the lifespan of the Reit or InvIT.
    • Self-Sponsored Investment Managers: This concept provides flexibility for Reit sponsors and potential exit options.

  • FinMin pushes for reforms to spur FDI inflows

    fdi

    Central Idea

    • The Finance Ministry of India emphasized the need to address challenges faced by global investors to facilitate Foreign Direct Investment (FDI) flows.
    • In this article, we delve into the factors affecting FDI inflows and propose measures to attract and sustain FDI in India.

    What is Foreign Direct Investment (FDI)?

    • FDI refers to the investment made by individuals, companies, or governments from one country into business interests located in another country.
    • It involves the direct ownership or control of assets in the foreign country, typically in the form of establishing new ventures, acquiring existing businesses, or creating strategic partnerships.

    Understanding FDI

    Imagine you have a successful toy manufacturing company based in Country A. You have been experiencing steady growth and want to expand your business operations to a new market in Country B. However, entering a foreign market can be challenging due to unfamiliarity with the local business environment, regulations, and market dynamics.

    To overcome these challenges, you decide to make a Foreign Direct Investment (FDI) in Country B. Instead of exporting toys from Country A to Country B, you establish a new manufacturing plant or acquire an existing toy company in Country B. By doing so, you gain direct ownership and control over the assets and operations in Country B.

     

    India’s FDI feats

    • In terms of investor countries of FDI Equity inflow, Singapore is at the top with 27%, followed by the US with 18% and Mauritius with 16% for the FY 2021-22.
    • ‘Computer Software & Hardware’ has emerged as the top recipient sector of FDI Equity inflow during this period with around 25% share followed by Services Sector and Automobile Industry with 12% each.
    • With 53 % Karnataka has received the majority share of FDI equity in the `Computer Software & Hardware’ sector.

    FDI in India

    • Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then FM Manmohan Singh.
    • Economic liberalisation started in India in the wake of the 1991 crisis and since then, FDI has steadily increased in the country.
    • India, today is a part of top 100-club on Ease of Doing Business (EoDB) and globally ranks number 1 in the Greenfield FDI ranking.

    There are two routes by which India gets FDI.

    1) Automatic route: By this route, FDI is allowed without prior approval by Government or RBI.

    2) Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate the single-window clearance of FDI application under Approval Route.

    • India imposes a cap on equity holding by foreign investors in various sectors, current FDI in aviation and insurance sectors is limited to a maximum of 49%.
    • In 2015 India overtook China and the US as the top destination for the Foreign Direct Investment.

    Sectors that come under the ‘100% Automatic Route’ category are

    • Agriculture & Animal Husbandry, Air-Transport Services (non-scheduled and other services under civil aviation sector)
    • Airports (Greenfield + Brownfield),
    • Asset Reconstruction Companies,
    • Auto-components, Automobiles,
    • Biotechnology (Greenfield),
    • Broadcast Content Services (Up-linking & down-linking of TV channels, Broadcasting Carriage Services,
    • Capital Goods, Cash & Carry Wholesale Trading (including sourcing from MSEs), Chemicals, Coal & Lignite, Construction Development,
    • Construction of Hospitals,
    • E-commerce Activities, Electronic Systems,
    • Food Processing, Gems & Jewellery, Healthcare, Industrial Parks, IT & BPM, Leather, Manufacturing, Mining & Exploration of metals & non-metal ores, Other Financial Services,
    • Pharmaceuticals, Plantation sector
    • Ports & Shipping, Railway Infrastructure, Renewable Energy, Roads & Highways,
    • Single Brand Retail Trading, Textiles & Garments,
    • Thermal Power,
    • Tourism & Hospitality and
    • White Label ATM Operations.

    Sectors that come under up to 100% Automatic Route’ category are–

    • Infrastructure Company in the Securities Market: 49%
    • Insurance: up to 49%
    • Medical Devices: up to 100%
    • Pension: 49%
    • Petroleum Refining (By PSUs): 49%
    • Power Exchanges: 49%

    Sectors that come under the ‘up to 100% Government Route’ category are–

    • Banking & Public sector: 20%
    • Broadcasting Content Services: 49%
    • Core Investment Company: 100%
    • Food Products Retail Trading: 100%
    • Mining & Minerals separations of titanium bearing minerals and ores: 100%
    • Multi-Brand Retail Trading: 51%
    • Print Media (publications/ printing of scientific and technical magazines/ specialty journals/ periodicals and facsimile edition of foreign newspapers): 100%
    • Print Media (publishing of newspaper, periodicals and Indian editions of foreign magazines dealing with news & current affairs): 26%
    • Satellite (Establishment and operations): 100%

    Prohibited Sectors

    There are a few industries where FDI is strictly prohibited under any route. These industries are

    • Atomic Energy Generation
    • Any Gambling or Betting businesses
    • Lotteries (online, private, government, etc.)
    • Investment in Chit Funds
    • Nidhi Company
    • Agricultural or Plantation Activities (although there are many exceptions like horticulture, fisheries, tea plantations, Pisciculture, animal husbandry, etc.)
    • Housing and Real Estate (except townships, commercial projects, etc.)
    • Trading in TDR’s
    • Cigars, Cigarettes, or any related tobacco industry

    Benefits offered by FDI

    • Employment generation: FDI boosts the manufacturing and services sector which results in the creation of jobs and helps to reduce unemployment rates in the country.
    • Economic growth: Increased employment translates to higher incomes and equips the population with more buying powers, boosting the overall economy of a country.
    • Human capital development: Skills that employees gain through training and experience can boost the education and human capital of a specific country. Through a ripple effect, it can train human resources in other sectors and companies.
    • Technology boost: The introduction of newer and enhanced technologies results in company’s distribution into the local economy, resulting in enhanced efficiency and effectiveness of the industry.
    • Increase in exports: Many goods produced by FDI have global markets, not solely domestic consumption. The creation of 100% export oriented units help to assist FDI investors in boosting exports from other countries.
    • Exchange rate stability: The flow of FDI into a country translates into a continuous flow of foreign exchange, helping a country’s Central Bank maintain a prosperous reserve of foreign exchange which results in stable exchange rates.
    • Improved Capital Flow: Inflow of capital is particularly beneficial for countries with limited domestic resources, as well as for nations with restricted opportunities to raise funds in global capital markets.
    • Creation of a Competitive Market: By facilitating the entry of foreign organizations into the domestic marketplace, FDI helps create a competitive environment, as well as break domestic monopolies.
    • Climate mitigation: The United Nations has also promoted the use of FDI around the globe to help combat climate change

    Factors Affecting recent FDI inflows

    (1) Inflationary Pressures and Tighter Monetary Policies

    • The dip in FDI inflows in 2022-23 can be attributed to inflationary pressures and tighter monetary policies.
    • Policymakers should address these factors to encourage a favorable investment climate.

    (2) Geopolitics vs. Geography

    • The Ministry highlights the influence of “political distance more than geographical distance” on FDI flows.
    • Geopolitical factors have dominated over traditional geographical considerations.

    (3) Global FDI Trends

    • Gross FDI flows declined by 16% in 2022, compared to the record high of $84.8 billion in 2021-22.
    • Net inflows experienced a sharper decline of 27.4%.
    • Similar trends were observed in emerging market economies, where net FDI inflows declined by 36% in 2022.

    Challenges for India’s Growth Outlook

    (1) External Sector Challenges:

    • The review identifies the external sector as a potential challenge for India’s growth in 2023-24.
    • Factors such as geopolitical stress, volatility in global financial systems, price corrections in global stock markets, El-Nino impact, and weak global demand could constrain growth.
    • Policymakers must closely monitor FDI data and undertake measures to facilitate FDI inflows.

    (2) Fragmentation of FDI Flows:

    • The Ministry highlights the phenomenon of “friend shoring,” wherein FDI is directed towards geopolitically aligned countries.
    • This has led to a fragmentation of FDI flows globally, as per research from the International Monetary Fund (IMF).
    • Additionally, inflows from foreign portfolio investors (FPIs) into Indian markets have become less volatile.

    Conclusion

    • To attract and sustain FDI inflows, India needs to address challenges related to inflation, monetary policies, geopolitical factors, and last-mile infrastructure.
    • Additionally, mitigating trade risks and fostering inclusive growth through job creation will contribute to a favorable investment climate.

  • Dabba Trading and its impact on the Economy

    dabba

    Central idea

    • The National Stock Exchange (NSE) has issued a series of notices warning retail investors about entities involved in ‘dabba trading’.
    • The NSE cautioned investors not to subscribe or invest using these products offering indicative, assured or guaranteed returns in the stock market as they are prohibited by law.
    • The entities involved in dabba trading are not recognized as authorized members by the exchange.

    What is Dabba Trading?

    • Dabba (Box) trading refers to informal trading that takes place outside the purview of the stock exchanges.
    • It involves betting on stock price movements without incurring a real transaction to take physical ownership of a particular stock as is done in an exchange.
    • In simple words, it is gambling centred around stock price movements.

    How does it work?

    • In dabba trading, investors place bets on stock price movements at a certain price point.
    • If the price point rises, they make a gain, and if it falls, they have to pay the difference to the dabba broker.
    • The broker’s profit from the investor’s loss, and vice versa.
    • Transactions are facilitated using cash and unrecognised software terminals or informal records, which helps traders stay outside the regulatory mechanism.

    What are the problems with dabba trading?

    • Since dabba traders do not maintain proper records of income or gain, they are able to escape taxation, which results in a loss to the government exchequer.
    • The use of cash also means that they are outside the purview of the formal banking system.
    • Investors in dabba trading do not have formal provisions for investor protection or grievance redressal mechanisms available within an exchange, which exposes them to the risk of broker defaults or insolvency.
    • Dabba trading also perpetuates a parallel economy, potentially encouraging the growth of black money and criminal activities.

    What is the current scenario?

    • Industry observers have reported that dabba brokers harass clients for default payments and refuse payments upon profit.
    • Potential investors are lured by aggressive marketing, ease of trading using apps with quality interfaces, and lack of identity verification.
    • Brokers keep their fees and margins open to negotiation depending on an individual’s trading profile.
    • The mechanism could potentially induce volatility and cause losses for the regulated bourse when dabba brokers look to hedge their exposures.

    What are the legal implications?

    • Dabba trading is recognised as an offence under Section 23(1) of the Securities Contracts (Regulation) Act (SCRA), 1956.
    • Upon conviction, it can invite imprisonment for a term extending up to 10 years or a fine up to ₹25 crore, or both.

     

  • National Champions Model for Infrastructure Development: Pros and Cons

    National

    Central Idea

    • Emerging economies struggle to provide functional and efficient infrastructure. Infrastructure has become a national aspiration good, a mechanism for job creation, and a necessity. The two biggest constraints on infrastructure provision are cost and public good component. This national champion’s model aims to incentivize private sector participation in infrastructure investments, but it also has its own set of challenges and limitations.

    Traditional Financing Approaches and their Limitations

    • The traditional approach to financing infrastructure has relied on tax revenues or government borrowing.
    • However, this creates a vicious trap as poorer economies generate less tax revenue, which limits infrastructure investment, leading to a further spinoff that affects the growth of the economy and keeps the country poor.
    • Increasing public borrowing domestically tends to crowd out private investment, exacerbating the problem.

    National

    The Public-Private Partnership Model and its Problems

    • The Indian government tried to incentivize private sector participation in infrastructure investment by introducing the Public-Private-Partnership (PPP) model in the early 2000s.
    • While the PPP model led to the construction of a lot of infrastructure, it ended in an avalanche of non-performing assets with public sector banks, private sector bankruptcies, accusations of widespread corruption, and a change in government in 2014.

    National

    The National Champions Model and its Innovations

    • The present government has modified the PPP approach by assigning the bulk of infrastructure provisioning for roads, ports, airports, energy, and communications to a few chosen industrial houses.
    • This is the national champions model where the government picks a few large conglomerates to implement its development priorities.
    • This model incentivizes national champions to build projects by providing subsidies to cover the costs.
    • New aspects of the National Champions Model:
    1. National champions need control over existing projects with strong cash flows to incentivize investment in projects with low returns and negative cash flows.
    2. Public association of champions with the government’s national development policy generates a competitive advantage for the champions in getting domestic and foreign contracts.
    3. Access to some cash-rich projects allows national champions to borrow from external credit markets by using these entities as collateral, which lowers the cost of finance of other.

    Benefits of National Champions Model

    • Economic growth: National champions can contribute to economic growth by generating revenue, creating jobs, and investing in research and development.
    • Strategic importance: The model can help ensure that the country has a strong presence in strategically important industries, such as defense or energy, which can be critical to national security.
    • Export competitiveness: National champions can become leaders in their respective markets and compete effectively in global markets, which can increase exports and improve the country’s trade balance.
    • Innovation: National champions can invest heavily in research and development, leading to technological advancements that can benefit the broader economy.
    • Access to capital: National champions may be able to access capital more easily than smaller companies, allowing them to make larger investments and pursue growth opportunities.

    The Problems with the National Champions Model

    • Too big to fail: Market and regulatory treatment of conglomerates as too big to fail. This means that these companies are so large and important to the economy that their failure could cause widespread harm to the financial system and the economy as a whole. This opens the door to market hysteria, delayed discovery of problems, and spillovers of sectoral problems into systemic shocks. The recent troubles of the Adani companies in India highlight the potential risks associated with this approach.
    • Encouraging market concentration that can be bad for efficiency and productivity: Concentrated markets reduce competition and can lead to higher prices, lower quality, and reduced innovation. When firms have market power, they have less incentive to improve their products or services, reduce costs, or innovate. This can result in lower overall productivity in the economy.
    • The risk of turning the country into an industrial oligarchy: An industrial oligarchy is where a small group of powerful and influential conglomerates control a large portion of the economy. This can have negative consequences for economic growth, social mobility, and political stability. An oligarchy may be resistant to change and less responsive to the needs and aspirations of the broader population.
    • Uneven playing field: The optics of an uneven playing field in terms of market access and selective regulatory forbearance that can become a significant deterrent for foreign investors.

    National

    Conclusion

    • While infrastructure is a necessary condition for growth, it is not a sufficient one. Effective demand is the problem, as seen in the power sector, where the inability of the power distribution companies to recover payments was the issue. India is at an inflection point in its development path, and the national champions model has its pros and cons that needs to be analyzed before its consideration.

    Mains Question

    Q. What is National Champions Model for Infrastructure development in India? Discuss its advantages and disadvantages.

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  • Bill to amend Multi-State Cooperative Societies Act introduced in LS

    The Multi-State Cooperative Societies (Amendment) Bill, 2022, aimed at bringing in transparency in the sector, was introduced in the Lok Sabha.

    What is MSCS Act, 2002?

    • Cooperatives are a state subject, but there are many societies such as those for sugar and milk, banks, milk unions etc. whose members and areas of operation are spread across more than one state.
    • The MSCS Act was passed to govern such cooperatives.
    • For example, most sugar mills along the districts on the Karnataka-Maharashtra border procure cane from both states.

    What are Multi-State Cooperatives?

    • They draw their membership from two or more states, and they are thus registered under the MSCS Act.
    • Their board of directors has representation from all states they operate in.
    • Administrative and financial control of these societies is with the central registrar, with the law making it clear that no state government official can wield any control on them.

    Why does the government plan to amend the Act?

    (1) Issues with Central Registrar

    • The exclusive control of the central registrar, who is also the Central Cooperative Commissioner, was meant to allow smooth functioning of these societies.
    • The central Act cushions them from the interference of state authorities so that these societies are able to function in multiple states.
    • What was supposed to facilitate smooth functioning, however, has created obstacles.
    • For state-registered societies, financial and administrative control rests with state registrars who exercise it through district- and tehsil-level officers.

    (2) Multiple checks and balances

    • Thus if a sugar mill wishes to buy new machinery or go for expansion, they would first have to take permission from the sugar commissioner for both.
    • Post this, the proposal would go to the state-level committee that would float tenders and carry out the process.
    • While the system for state-registered societies includes checks and balances at multiple layers to ensure transparency in the process, these layers do not exist in the case of multistate societies.
    • Instead, the board of directors has control of all finances and administration.

    (3) Lack of govt control

    • There is an apparent lack of day-to-day government control on such societies.
    • Unlike state cooperatives, which have to submit multiple reports to the state registrar, multistate cooperatives need not.
    • The central registrar can only allow inspection of the societies under special conditions — a written request by one-third of the members of the board.
    • Inspections can happen only after prior intimation to societies.

    (4) Lack of infrastructure

    • The on-ground infrastructure for central registrar is thin — there are no officers or offices at state level, with most work being carried out either online or through correspondence.
    • For members of the societies, the only office where they can seek justice is in Delhi, with state authorities expressing their inability to do anything.

    (5) Ponzi schemes functioning as MCS

    • There have been instances across the country when credit societies have launched ponzi schemes taking advantage of these loopholes.
    • Such schemes mostly target small and medium holders with the lure of high returns.
    • Fly-by-night operators get people to invest and, after a few instalments, wind up their operations.

    Need for Amendment

    • At present, India has more than 1,500 multi-State cooperative societies.
    • The Bill seeks to strengthen governance, reform the electoral process, improve the monitoring mechanism, and ensure ease of doing business in multi-State cooperative societies.
    • It also aims to improve the composition of boards and ensure financial discipline, besides enabling the raising of funds in multi-State cooperative societies.

    Key establishments under the Amendment Bill

    • In order to make the governance of multi-State cooperative societies more democratic, transparent and accountable, the Bill has provisions for setting up of –
    1. Cooperative Election Authority,
    2. Cooperative Information Officer and
    3. Cooperative Ombudsman.

    Other features

    • Constitution of interim board: The Bill allows the central registrar to declare any multi-state cooperative society as sick. The Central government may, on the recommendation of the registrar, appoint an interim board for a maximum of five years. The central registrar can also declare a cooperative to be viable within the five years. The board of directors before the cooperative was declared sick shall be reinstated.
    • Elections: The Act states that elections shall be conducted by the existing board. The Bill amends this to state that the Central government may appoint a Cooperative Election Authority to conduct elections in cooperative societies to be prescribed.
    • Constitution of Fund: The Bill states that the central government shall set up the Cooperative Rehabilitation and Reconstruction Fund. A cooperative society shall credit 0.005% to 0.1% of its turnover to the fund, provided it does not exceed Rs 3crores per year.

     

     

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  • Declining Consumer Demand and Reluctant Investors

    Consumer Demand

    Context

    • In September, Finance Minister Nirmala Sitharaman was anguished that industry was holding back from investing in manufacturing despite a significant cut in corporate tax rates in 2019.

    Analyzing the corporate Investment since the pandemic

    • Less investment is not the result of losses: The slowdown in corporate investment did not happen because companies were making losses.
    • More profit but less investments by corporates: In fact, private companies, boosted by considerable tax cuts, made windfall profits. A State Bank of India analysis shows that tax cuts contributed 19% to the top line of companies during the pandemic. But this did not result in increased investments.
    • Dividends to shareholders: Before the pandemic, instead of investing in themselves, companies chose to reward shareholders with higher dividends.
    • Investment in equity and debt instead of Infrastructure: During the pandemic, they did not use the profits for paying out dividends; they retained a big chunk of the profits. However, instead of investing in buildings, plants and machinery, they invested in equity shares and debt instruments.
    • Corporate cited the slowdown in demand as reason for less investment: So, both before and after the outbreak, they shied away from capital investments. The hesitancy to invest can be explained by a slowdown in the demand side of the economy.
    • Corporates didn’t invest in long term returns sectors: Consumer demand started to decline the year before the pandemic and worsened after the COVID19 outbreak. This forced companies to use the increased profits to decrease their debts, pay dividends and invest in financial instruments instead of increasing productivity by making capital investments.

    Consumer Demand

    What is The current consumer’s demand situation?

    • Average Consumer sentiment index: Private companies invest when they are able to estimate profits, and that comes from demand. The Centre for Monitoring Indian Economy’s (CMIE) consumer sentiment index is still below pre-pandemic levels but is far higher than what was seen 12-18 months ago.
    • Buoyant Aggregate demand: RBI’s Monetary policy report dated September 30 says, Data for Q2 (ended Sept) indicate that aggregate demand remained buoyant, supported by the ongoing recovery in private consumption and investment demand. It shows that seasonally adjusted capacity utilization rose to 74.3% in Q1 the highest in the last three years.
    • High household savings: Along with household savings intentions remaining high, might hold the key to the investment cycle kicking in.

    Consumer Demand

    Statistic on demand and investment

    • New investment projects: The new investment projects announced as a % of GDP, since FY18, the share has remained below the 5% mark, compared to over 9% between FY05 and FY22.
    • Collection of corporate tax decreased: Corporate tax and income tax collected in India as a % of GDP after the cut in 2019, the share of corporate tax declined dramatically, while the share of income tax gradually increased.
    • Double burden on tax payers: The shift in tax burden from the corporates to the people came at a time of job losses and reduced income levels. This pushed more people into poverty.
    • Corporate profit increased after tax cut: Profit after tax earned by non-financial private companies in ₹ trillion after the tax cut, the profits of these companies rose to ₹4-5 trillion in the last two financial years from ₹1-2 trillion in many of the previous periods.
    • Increase and decrease in dividend to shareholders: Dividends paid by non-financial private companies as a share of profits earned after tax, Payouts to shareholders surged in FY20, the year before the pandemic, but reduced in the following years.
    • Profit retention increased: Retained profits as a % of profit after tax surged to 63% in FY22 the highest in a decade (limited companies were analyzed in FY22, so data are provisional).
    • Profits are invested in equities: In FY21, the debt-to-equity ratio came down to 0.86 the lowest in at least three decades. In FY22 (provisional data), it came down further to 0.71.
    • Year on year decline in capital investment: Year on year change in the investments of non-financial private companies in fixed assets such as buildings, plants, machinery, transport and infrastructure have declined in recent years. But the year on year change in investments in financial instruments such as equity, debt and mutual funds have surged.

    Consumer Demand

    Conclusion

    • Corporates are holding their pockets in hope of demand rise in future. However, this affects the post-pandemic recovery of economy. IMF and RBI was right to revise their growth forecast this year. Unequal recovery of economy have certainly affected the income levels of middle class. Government has taken a lot of step on supply side (corporate side and banking reform) but no intervention in revival of demand.

    Mains Question

    Q. Analyze the corporate investment pattern before and after the pandemic? What are the reasons for decline in corporate investment in fixed assets in economy since the pandemic?

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  • Bringing Business friendly Industrial Laws

    Business

    Context

    • The government’s proposal to bring a “holistic decriminalisation” bill in the Winter Session of Parliament, If gets enacted into law, it will be one of India’s greatest reforms since 1991. One of the objectives of this proposed law is to “end harassment and reduce compliance burden on businesses.

     What is Holistic decriminalisation Bill?

    • A new holistic decriminalisation bill is set to amend burdensome provisions in laws related to businesses.
    • Union Minister of Commerce and Industry, Piyush Goyal said that the Decriminalising sections of various laws will end the harassment faced by businesses and reduce compliance burden. Seeking quick industry feedback on problematic areas that can be covered in the proposed Bill.

    What is the status of existing laws in India?

    • Burden of Imprisonment clauses: Business regulatory universe comprises 1,536 laws, of which more than half, or 843 laws, carry imprisonment clauses. Under these laws, there are 69,233 compliances businesses face as an aggregate, of which almost two out of five, or 26,134, carry imprisonment clauses.
    • Union and state legislations on the compliance: Of the 843 laws with imprisonment clauses, 28.9 percent, or 244 laws, have been enacted by Parliament; the rest by State legislatures and rules. Of the 26,134 compliances that carry imprisonment clauses, a fifth, or 5,239 clauses are situated in Union laws.
    • No institutional support for informal sector: Of the 69 million enterprises in India, only 1 million are formal employers; as a result, the remaining informal enterprises get no access to institutional capital, talent, or supply chains.
    • Smaller the better attitude: India’s predatory and rent-seeking policy infrastructure ensures that businesses choose to remain under the regulatory radar—small may not be beautiful but it is certainly safe. For instance, a small business with 150 employees or more has to deal with 500 to 900 compliances a year, on which it can end up spending up to INR 12-18 lakhs by hiring consultants to be compliant with labour laws, taxes, factories, and so on.
    • Burden of compliance is cost-effective: Creating a regulatory bias against small businesses once a line of scale is crossed, managing a compliance department becomes cost-effective; until then, for the small business owner-manager, compliances becomes a risk-management strategy, almost an economic activity.

    Business

    Why such reforms in business laws are necessary?

    • To attract more investment: When viewed through the lens of the government’s intention to make India an investment destination for global and domestic capital, it would be a reform that should end the endemic of harassment, corruption, and rent-seeking by officials of the Union government.
    • To end corruption at state level: Corruption by officials of state governments will end when criminal provisions in State laws and rules get similarly rationalised; some of these will get rationalised with amendments to Union laws that are enforced by state governments.
    • Encouraging the entrepreneurial spirit: Regulatory framework is cumulative policy actions of the three arms of the State the executive, the legislature, and the judiciary using instruments of legislations, rules, regulations, or orders, to create or raise barriers to a smooth flow of ideas, organisation, money, and, most importantly, the flow of the entrepreneurial spirit.

    Business

    What are the recommendations for Holistic decriminalization?

    • Amend the overreaching laws: Reform all compliances with overarching legislation, across ministries and departments. Smaller steps being taken to ease doing business in India, such as shifting the responsibility under the Legal Metrology Rules from directors to executives, should converge into this single bill.
    • There should be Justifiable imprisonment: Use criminal penalties in business laws with extreme restraint the idea of using a criminal clause as a default option should be done away with and replaced by a justification for imprisonment, including the term in jail.
    • Ending the criminalisation: End the criminalisation of all compliance procedures such as filing on a wrong form or mislabelling.
    • Introducing new laws: Introduce sunset clauses for all imprisonment clauses this needs a new enabling law as a precursor.
    • Bringing extensive Digitisation: Digitise all compliance filings, as has been done by the income tax department.
    • Focus on paperless work: Convert every department that acts as a regulatory body to go paperless and faceless. This should look beyond merely creating a website and uploading records. This will enable automated record reconciliation, identify leakages, detect frauds, and flag discrepancies.
    • More such steps in the right direction: By reducing the compliance burden such that it ends harassment, the government is moving in the right direction. To prevent any policy holes left after the passage of the bill into an act, this is a law that needs to be studied hard, debated well, and only then enacted. Of course, there will be political opposition. It is up to the government to ignore the rhetoric and embrace the solutions for the greater good of the country.

    BusinessConclusion

    • The country is getting ready for third-generation reforms. Among them are reforms that rationalise compliances and imprisonment clauses—retain a handful, reduce or remove most, compound the rest and turn physical imprisonment into financial penalties. The Inspector Raj, expressed through the colonial, corrupt, and rent-seeking policy infrastructure, must be disassembled and jobs, wealth, and large enterprises created.

    Mains Question

    Q. Why current industrial policy and laws are causing the harassment of entreprenuers? Discuss the reforms needed in the light of proposed “ Holistic Discrimination” Bill.

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