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  • Govt discontinues Gold Monetization Scheme

    Why in the News?

    The Centre has decided to discontinue the Gold Monetization Scheme (GMS) starting from March 26, 2025, considering evolving market conditions.

    The short-term deposits (1-3 years) will continue at the discretion of individual banks based on commercial viability, highlighting a shift towards flexible, shorter-term options.

    About Gold Monetization Scheme (GMS) and its Features

    • The GMS was launched in November 2015 as an enhanced version of the Gold Deposit Scheme (GDS) and Gold Metal Loan (GML) Scheme.
    • The main goal was to mobilize idle gold from households and institutions into the formal economy, thereby reducing the country’s reliance on gold imports and improving the current account deficit (CAD).
    • Objectives: Aimed at mobilizing gold, reducing gold imports, and utilizing gold to generate interest as a financial asset, thereby strengthening the economy.
    • The GMS included three deposit options:
      • Short-Term Gold Deposit (STGD): 1-3 years
      • Medium-Term Gold Deposit (MTGD): 5-7 years
      • Long-Term Gold Deposit (LTGD): 12-15 years
    • Interest and Redemption:
      • Short-Term Deposits: Interest rates determined by individual banks; redemption could be in cash or gold.
      • Medium- and Long-Term Deposits: Fixed interest rates at 2.25% (medium-term) and 2.5% (long-term), with cash redemption only.
    • Eligibility Criteria:
      • Open to individuals, institutions, and government entities.
      • Gold tendering accepted only at designated Collection and Purity Testing Centres (CPTC) or through GMS Mobilisation Agents.
      • Deposits were accepted only if the value exceeded ₹1 lakh.

    Reasons for Discontinuation  

    • The Finance Ministry discontinued the Medium-Term and Long-Term Deposits due to changes in the gold market.
    • Gold prices surged by 41.5% from ₹63,920 per 10 grams in January 2024 to ₹90,450 per 10 grams by March 2025.
    • This rise in gold value reduced the attractiveness of schemes like GMS for both depositors and the government.
    • With the closure of the Sovereign Gold Bond Scheme, the government aims to shift towards more market-oriented solutions for gold-related financial products.
    [UPSC 2016] What is/are the purpose/purposes of the Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme’?

    1. To bring the idle gold lying with Indian households into the economy.

    2. To promote FDI in the gold and jewellery sector

    3. To reduce India’s dependence on gold imports

    Select the correct answer using the code given below:

    (a) 1 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3

     

  • SEBI forms panel for reviewing economic structure of clearing corporations  

    Why in the news?

    SEBI forms a committee to review clearing corporations’ ownership and economic structure, aiming to enhance resilience, independence, and neutrality as risk managers.

    About the Securities and Exchange Board of India (SEBI):

    • SEBI is the capital markets regulator in India responsible for regulating the securities market and protecting the interests of investors.
    • It was established in 1988 and given statutory powers in 1992 under the SEBI Act.
    • SEBI’s functions include regulating stock exchanges, registering and regulating brokers and other intermediaries, and promoting fair and transparent securities markets.

    What is a Clearing Corporation? 

    • A clearing corporation is a central counterparty (CCP) that provides clearing and settlement services for trades executed on various exchanges.
    • It acts as an intermediary between buyers and sellers, guaranteeing the completion of transactions and managing counterparty risk.
    • Clearing corporations ensure the smooth functioning of financial markets by facilitating the timely settlement of trades and reducing systemic risk.

    About Usha Thorat Committee on Reviewing the Ownership and Economic Structure of Clearing Corporations:

    • SEBI has formed a committee chaired by Usha Thorat, former Deputy Governor of the Reserve Bank of India (RBI), to review the ownership and economic structure of clearing corporations.
    • The committee’s mandate includes examining the ownership structure and finances of clearing corporations to ensure their resilience, independence, and neutrality as risk managers.
    • It will assess the feasibility of broadening the list of eligible investors allowed to hold stakes in clearing corporations and suggest categories of investors who can acquire such stakes.
    • The committee will also explore alternative ownership structures and shareholding patterns suited to an interoperable environment, where clearing corporations provide services across multiple exchanges.
    • It aims to propose alternatives that address the periodic capital needs of clearing corporations and ensure sufficient capital and liquidity during market-wide systemic stress.
    • The current ownership structure of clearing corporations is dominated by the parent exchange, which exposes them to the expectations of shareholders of the parent exchange.

    Conclusion: The Usha Thorat Committee aims to enhance the resilience and independence of clearing corporations by exploring alternative ownership structures and suggesting measures to ensure adequate capital and liquidity.

    Mains PYQ: 

    Q The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.(UPSC IAS/2013)

  • Regulatory Challenges in Alternative Investment Funds (AIFs)

    Why in the News?

    In response to tightening regulations impacting operations, the RBI has recommended that investments exceeding 50% of Alternative Investment Funds (AIFs) units by a person resident outside India be treated as Indirect Foreign Investment.

    BACK2BASICS:

    What are Alternative Investment Funds (AIFs)?

    • An Alternative Investment Fund or AIF is any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors, for investing by a defined investment policy for the benefit of its investors.
    • AIFs are regulated by the SEBI (Securities and Exchange Board of India).
    • As per the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF can be set up as a trust, a company, a limited liability partnership, or a corporate body.

    Who can invest in an AIF?

    • Indian Residents, NRIs (Non-Resident of India), and foreign nationals are eligible to invest in these funds.
    • Joint investors can also invest in AIF. They can be spouse, parents, or children of investors.
    • The minimum investment amount for investors is Rs1 crore for investors. For directors, employees, and fund managers, this limit is Rs 25 lakh.
    • Most AIFs come with a minimum lock-in period of three years.
    • The maximum number of investors in every scheme is capped at 1,000. However, in the case of angel fund, the cap is 49.

    Categories of an applicant who can seek registration as an AIF:

    • Category I and II AIFs are required to be close-ended and have a minimum tenure of three years. Category III AIFs may be open-ended or close-ended.

    Note: Investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as Indirect Foreign Investment (IFI). It is also known as downstream investment.

    Present Regulatory Landscape:

    • Regulatory Ambiguity: Recent regulatory notes have instilled mistrust in the industry, particularly regarding Foreign Direct Investment (FDI) policy surrounding AIFs, spooking investors and prompting reconsideration of fund deployment strategies.
    • Changing Stance: The regulatory stance has evolved, with amendments in 2015-16 allowing AIFs to attract foreign capital through the automatic route, promoting onshore management and incentivizing Indian fund managers to relocate to India.

    Offshore Alternatives:

    • Reason for Offshoring: Offshore funds benefit from a more stable regulatory environment, with considerations for tax implications necessitating careful structuring.
    • Attractive Destination: Gujarat International Finance Tec-City (GIFT City) has emerged as an attractive alternative for managers due to regulatory stability, tax incentives, and proximity to India.

    PYQ:

    [2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic?

    (a) It is the investment through capital instruments essentially in a listed company.

    (b) It is a largely non-debt-creating capital flow.

    (c) It is the investment which involves debt-servicing.

    (d) It is the investment foreign institutional investors make in Government securities.

  • 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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