Subject: Economics

Regulator SEBI expands promoter definition for IPO-bound companies

Why in the news?

SEBI expands promoter definition for IPO-bound companies, including founders holding 10% or more, and their immediate relatives.
- According to current SEBI regulations, a promoter is someone who controls the affairs of the company or can appoint the majority of directors or is named as such in an offer document.

What is an IPO?

An IPO is an initial public offering, in which shares of a private company are made available to the public for the first time.
An IPO allows a company to raise equity capital from public investors.
The Dutch are credited with conducting the first modern IPO by offering shares of the Dutch East India Company to the general public.

What Norms Say

Expanded Definition of Promoter: The definition of a promoter has been expanded for companies preparing for an IPO. A promoter is someone who controls the company’s affairs, can appoint the majority of directors, or is named as such in an offer document.
Previous Criteria: Founders holding 25% were previously deemed promoters due to their negative control and power to block special resolutions.
New Criteria: Founders holding 10% or more must classify themselves as promoters if they are key managerial personnel (KMP) or directors in the company. Immediate relatives on the company board or KMP will also be classified as promoters, even if they hold just 1%.

About Declassification and 31A of LODR (Listing Obligations and Disclosure Requirements) Regulations

Declassification Difficulty: The current regulations do not provide an easy path for declassifying a promoter as a public shareholder.
Rule 31A of LODR Regulations: To be declassified, a person must not hold more than 10% in the listed company along with their relatives.
Restrictive Nature: This restrictive rule makes declassification almost impossible for immediate relatives who are classified as promoters by virtue of their relationship, especially problematic for married daughters with no active role in the company.

Issue Over Subjective Definition

Subjective Nature of Promoter Definition: The definition of a promoter has been historically subjective, leading to varying interpretations and legal disputes.
Court Rulings: There have been several court rulings addressing the subjective nature of who qualifies as a promoter, highlighting inconsistencies and complexities.
Complex Criteria: Accounting standards and regulatory criteria for determining control and influence in a company are often complicated and can be interpreted in multiple ways.
Need for Objectivity: Experts argue for a more objective test to ascertain control and promoter status, which would provide clearer guidelines and reduce disputes.
Example: Vinod Kothari, Director at Vinod Kothari Consultants, points out that moving towards an objective test is a positive step, given the current complexities in determining control.

Way forward:

Standardised Guidelines: Develop clear and standardised guidelines for identifying promoters, reducing subjectivity and ensuring consistency.
Detailed Disclosures: Mandate detailed disclosures from companies about their promoters, including shareholding patterns, roles, and influence in decision-making.

Mains PYQ:

Q In the light of Satyam Scandal (2009), discuss the changes brought in corporate governance to ensure transparency and accountability. (UPSC IAS/2015)

June 7, 2024

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)

June 6, 2024

Netherlands becomes India’s 3rd Largest Export Destination in 2023-24

Why in the News?

During fiscal year 2023-24, the Netherlands emerged as India’s third-largest export market, with a trade surplus expanding to $17.4 billion.

India’s Trade with the Netherlands

Key Export Commodities: Notable export items to the Netherlands include petroleum products ($14.29 billion), electrical goods, chemicals, and pharmaceuticals, showcasing robust growth in these sectors.
Continual Expansion: India’s exports to the Netherlands have steadily risen by approximately 3.5% to reach $22.36 billion in 2023-24, illustrating sustained growth momentum.
Mutual Investment: The Netherlands is a significant investor in India, with foreign direct investment (FDI) amounting to about $5 billion during the last fiscal.
Corporate Presence: Over 200 Dutch companies, including industry giants like Philips, Akzo Nobel, and KLM, operate in India, while Indian firms like TCS, HCL, and Sun Pharmaceuticals have a substantial presence in the Netherlands.

Shift in Trade Dynamics

Outpacing Major Destinations: The Netherlands has surpassed traditional trade partners such as the U.K., Hong Kong, Bangladesh, and Germany in terms of India’s export focus.
Long-term Growth: Export figures have shown consistent growth since 2000-01 when India’s exports to the Netherlands were a mere $880 million.

Significance: Gateway to Europe

Strategic Positioning: The Netherlands’ efficient ports and extensive connectivity with the EU via roads, railways, and waterways have positioned it as a vital gateway to the European market.
Strong Ties: Diplomatic relations between India and the Netherlands, established in 1947, have evolved into robust political, economic, and commercial partnerships.

India’s Trade Dynamics

Export Figures:

Forecasted to reach approximately US$776.68 billion in FY 2023–24.
Slightly surpassed the US$776.40 billion recorded in the previous fiscal year.
Concluded with the highest monthly merchandise exports of US$41.68 billion in March 2024.

Import Figures:

Total goods imports decreased by 5.66 percent to US$675.44 billion.

Global Merchandise Export Ranking:

India advanced from 19th to 17th place.
Marginal increase in share from 1.70 percent in 2014 to 1.82 percent in 2023.
Exported to 115 countries out of a total of 238 destinations during FY 2023-24.

Key Export Markets:

Include the US, UAE, Netherlands, China, UK, Saudi Arabia, Singapore, Bangladesh, Germany, and Italy.
Represent 46.5 percent of India’s export portfolio.

Diversification Strategy:

Focus on expanding beyond traditional sectors like iron ore and agricultural commodities.
Target sectors include electronics, pharmaceuticals, engineering products, and food items.
Plan to introduce goods such as alcoholic beverages, prepared meals, confectioneries, jackfruit, and bananas.
Emphasis on market research and analysis for product customization.

Trade Partners:

China emerged as India’s largest trading partner, surpassing the US.
Bilateral trade with China totalled US$118.4 billion in FY 2023-24.
Bilateral trade with the US amounted to US$118.3 billion in the same period.
India’s exports to China increased by 8.7 percent in FY24, driven by various sectors.
Imports from China rose moderately, totalling US$101.7 billion.

(Source of Data: Ministry of Commerce and Industry, Department of Commerce)

PYQ:

[2013] The balance of payments of a country is a systematic record of:

(a) All import and export transactions of a country during a given period of time, normally a year.

(b) Goods exported from a country during a year.

(d) Capital movements from one country to another.

June 6, 2024

[pib] FSSAI Directive on Fruit Juices

Why in the News?

FSSAI has mandated the immediate removal of any claims stating ‘100% fruit juices’ from labels and advertisements of reconstituted fruit juices by all Food Business Operators (FBOs).
- FBOs must utilize existing pre-printed packaging materials before September 1, 2024, to comply with the directive.

Compliance Guidelines on Fruit Juices

Products falling under this standard must be labelled as per the Food Safety and Standards (Labelling and Display) Regulations, 2020.
The term “reconstituted” must be specified in the ingredient list for juices reconstituted from concentrate.
Additionally, if the product contains added nutritive sweeteners exceeding 15 gm/kg, it must be labelled as ‘Sweetened juice’.

Issues with such ‘Sweetened juice’

Misleading Marketing Practices: FSSAI has observed numerous FBOs inaccurately labelling various types of reconstituted fruit juices as 100% fruit juices.
Regulatory Assessment: Upon evaluation, FSSAI determined that such claims are misleading, especially when the major ingredient is water, and the primary ingredient is present in limited concentrations or when the juice is reconstituted using water and fruit concentrates or pulp.

About Food Safety and Standards Authority of India (FSSAI)

The FSSAI is an autonomous body established under the Ministry of Health & Family Welfare, Government of India.
It was established under the Food Safety and Standards Act, of 2006, which consolidates various acts and orders that have hitherto handled food-related issues in various ministries and departments.
FSSAI is responsible for protecting and promoting public health through the regulation and supervision of food safety.

Functions of FSSAI include:

Setting Standards: FSSAI sets standards for food products and regulates their manufacture, storage, distribution, sale, and import, to ensure that food items are safe for consumption.
Licensing and Registration: FSSAI grants licenses and registrations to food businesses based on their compliance with food safety standards and regulations.
Inspections and Monitoring: FSSAI conducts inspections, surveillance, and monitoring of food products and food businesses to ensure compliance with food safety standards.
Awareness and Education: FSSAI works towards creating awareness about food safety and hygiene among food businesses and consumers. It provides information and education programs to promote safe food handling practices.
Research and Development: FSSAI undertakes research and development activities related to food safety and standards.

Health Awareness Initiatives by FSSAI

“Heart Attack Rewind”: This is FSSAI’s inaugural mass media campaign, designed to support its goal of eliminating trans-fat from India by 2022.
FSSAI-CHIFSS Collaboration: FSSAI has partnered with the CII-HUL Initiative on Food Safety Sciences to foster collaborations between industry, the scientific community, and academia to enhance food safety.
State Food Safety Index (SFSI): Developed by FSSAI, the SFSI evaluates states’ performance on five key parameters of food safety: Human Resources and Institutional Data, Compliance, Food Testing Infrastructure and Surveillance, Training & Capacity Building, and Consumer Empowerment.
Eat Right India Movement: This is a joint initiative by the Government of India and FSSAI aimed at revolutionizing the country’s food system to ensure safe, healthy, and sustainable food for all citizens.
Eat Right Station Certification: FSSAI awards this certification to railway stations that meet the benchmarks outlined in the Food Safety and Standards Act, 2006, ensuring the provision of safe and wholesome food to passengers.

PYQ:

[2018] Consider the following statements:

The Food Safety and Standards Act, 2006 replaced the Prevention of Food Adulteration Act, 1954.
The Food Safety and Standards Authority of India (FSSAI) is under the charge of Director General of Health Services in the Union Ministry of Health and Family Welfare.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

June 5, 2024

What is Greedflation?

Why in the News?

Political campaigns highlight inequality in India. Accusations suggest billionaires amass wealth through monopolistic control, dictating prices and suppressing real wages.

Monopoly Power and Economic Dynamics

Monopoly Influence: Billionaires often amass wealth through monopolistic control, enabling them to dictate prices and suppress real wages.
Consumption Conundrum: Higher mark-ups under monopolies lead to reduced real wages and diminished consumption power, hindering economic growth and investment.
Greedflation Impact: The phenomenon of “Greedflation,” where companies raise prices to bolster profit margins amidst multiple demand-and-supply shocks, exacerbates inflationary pressures, particularly observed in developed economies.

So what is Greedflation?

Definition: Greedflation, in essence, signifies that corporate greed is driving inflation, rather than the traditional wage-price spiral, leading to a profit-price spiral.
Corporate Exploitation: Companies exploit inflation by significantly raising prices, surpassing the need to cover increased costs, thereby maximizing profit margins and perpetuating inflation.
Profit-Price Spiral: Unlike the wage-price spiral, it involves companies exploiting inflation by excessively raising prices to maximize profit margins, triggering a cycle of inflation.

Illustrative Scenario

Crisis Dynamics: During crises such as natural disasters or pandemics, businesses often raise prices due to increased input costs.
Exploitative Practices: However, some businesses exploit the situation by engaging in excessive profit-making through significantly inflated price mark-ups.

Impact of Greedflation

Disproportionate Impact: Greedflation disproportionately affects low-income and middle-class individuals, diminishing their consumption and lowering living standards.
Wealth Disparities: While benefiting the wealthy by inflating asset values, it widens the wealth gap and exacerbates income inequality.
Market Instability: Sharp price increases and speculative activities driven by greed can create bubbles and unsustainable market conditions, heightening the risk of financial market crashes and crises.

Global Implications

Divergent Policies: Inflationary pressures from greedflation may lead to divergent policy responses among nations.
Trade and Geopolitical Risks: Conflicting strategies to combat inflation can exacerbate global imbalances, trade tensions, and geopolitical conflicts as countries prioritize their interests and competitiveness.

PYQ:

[2015] Which reference to inflation in India, which of the following statements is correct?

(a) Controlling the inflation in India is the responsibility of the Government of India only.

(b) The Reserve Bank of India has no role in controlling the inflation.

(d) Increased money circulation helps in controlling the inflation.

June 5, 2024

India’s GDP growth is impressive, but can it be sustained?

Why in the news?

The release of India’s GDP data was eagerly anticipated, especially following the recent upgrade in the “sovereign rating outlook” by S&P. It comes just days before the announcement of the union election results.

Back2Basics: Rating Agency

A rating agency is a company that assesses the financial strength of companies and government entities, especially their ability to meet principal and interest payments on their debts.
Fitch Ratings, Moody’s Investors Service and Standard & Poor’s (S&P) are the big three international credit rating agencies controlling approximately 95% of the global rating business.
In India, six credit rating agencies are registered under the Securities and Exchange Board of India (SEBI): CRISIL, ICRA, CARE, SMERA, Fitch India and Brickwork Ratings.

What does the data say?

India’s GDP growth for 2023-24 is 8.2%, exceeding market expectations and surpassing the previous year’s growth of 7%.
Fourth-quarter growth is particularly robust at 7.8%, with upward revisions in previous quarters contributing to overall growth.
Notable divergence of 1 percentage point between GDP and GVA growth in 2023-24, mainly due to increased net taxes.
Sectoral analysis reveals mixed performance, with manufacturing and construction showing strong growth, while agriculture remains subdued.
Expenditure-side breakdown highlights a slower growth rate in private consumption but healthy growth in investment, led mainly by government spending.

Pillars need to be sustained:

Private Consumption: Ensuring sustained consumer spending, particularly by addressing high inflation and low wage growth, to maintain economic momentum.
Investment: Continuously stimulating both government and private sector investment to drive economic expansion and foster innovation and productivity.
Exports: Maintaining competitiveness in global markets and promoting export-oriented growth to leverage external demand and diversify revenue sources.

How to ensure the benefits of high growth trickle down to the lower-income categories?

Improving Private Consumption: Focus on reviving private consumption, especially among lower-income groups. Address concerns of high inflation and low wage growth affecting consumer confidence.
Enhancing Employment Opportunities: Prioritize improving the employment scenario, particularly in sectors generating significant employment like IT and the unorganized sector. Recognize the importance of employment in sustaining consumption growth and overall economic stability.
Investment in Rural Development: Ensure spatial and temporal distribution of rainfall for rural demand recovery. Moderating food inflation and improving employment conditions crucial for rural consumption revival.
Boosting Private Capex Cycle: Create an environment conducive to private investment, focusing on policy certainty and confidence in economic stability. Encourage private sector investment through favourable policies and supportive regulatory frameworks.
Policy Focus on Inclusive Growth: Direct policy attention towards ensuring that the benefits of high growth extend to lower-income categories. Implement targeted social welfare programs and initiatives to support vulnerable groups and reduce income inequality.
Monitoring Global Developments: Stay vigilant of global economic trends and developments that could impact the Indian economy, such as geopolitical tensions and supply shocks. Adapt policies accordingly to mitigate risks and capitalize on opportunities for sustained economic growth.

Conclusion: The Indian government aims to bolster equitable growth through measures such as stimulating private consumption, enhancing employment prospects, and fostering a conducive investment environment, supported by targeted policies and proactive global monitoring.

Mains PYQ:

Q Explain the difference between the computing methodology of India’s Gross Domestic Product (GDP) before the year 2015 and after the year 2015. (UPSC IAS/2021)

June 4, 2024

RBI brings back 100 tonnes Gold from UK to its Vaults

Why in the News?

The RBI has repatriated over 100 tonnes of gold from the UK to its domestic vaults, the largest transfer since at least 1991.

What are Gold Reserves?

- A gold reserve is the gold held by a country’s central bank, acting as a backup for financial promises and a store of value.
- India, like other nations, stores some of its gold reserves in foreign vaults to spread out risk and facilitate international trading.

India’s Gold Reserves:

- As of the end of March 2024, the RBI held 822.10 tonnes of gold, with 408.31 tonnes stored domestically.
- The share of gold in the total forex of India is around 7-8% as of 2023.

Where does the RBI store its gold?

India’s gold reserves are primarily stored in the Bank of England, which is known for its stringent security protocols.
The RBI also stores a portion of its gold reserves at the:

Bank for International Settlements (BIS) in Basel, Switzerland, and the
Federal Reserve Bank of New York in the United States.

During India’s foreign exchange crisis in 1990-91, the country pledged some of its gold reserves to the Bank of England to secure a $405 million loan, according to reports.
Even though the loan was paid back by November 1991, India decided to keep the gold in the UK for convenience.

Why does the RBI store its gold in foreign banks?

Convenience: Storing gold overseas makes it easier for India to trade, engage in swaps and earn returns.
Averting Risks: There are risks involved, especially during times of geopolitical tensions and war.
- The recent freezing of Russian assets by Western nations has raised worries about the safety of assets kept abroad and the RBI decision to shift a portion of the gold reserve to India could be prompted by these concerns.
Stable Prices: Unlike fiat currencies, which can be subject to inflation or devaluation due to various economic factors, the value of gold tends to be relatively stable over time, which makes it an attractive asset for central banks to hold as a reserve.

Benefits Offered by Gold Reserves

Control domestic gold prices: With its big stash of gold, the RBI can help control local gold prices by using some of it in India. Last financial year, the RBI added about 27.47 tonnes of gold to the total reserve, bringing it to 794.63 tonnes.
Security buffer: The increased gold reserve works as a hedge against any financial crisis and to take measures to control inflation as well as currency devaluation.

Why is the recent move significant?

Efficiency and Confidence: Bringing gold back to India reduces storage fees and signals confidence in the stability of the Indian economy.
Logistical Efficiency: Moving gold to India saves on storage fees paid to foreign custodians, such as the Bank of England.
Diversified Storage: Repatriation ensures diversified storage, enhancing security and reducing dependency on foreign storage.

Has the RBI made similar purchases or transfers of gold in the past?

RBI started buying gold in 2018 and had previously bought 200 tonnes during the global financial crisis in 2009.
In the first quarter of 2024, the RBI bought 19 tonnes of gold, surpassing the 16 tonnes purchased throughout 2023.

PYQ:

[2015] The problem of international liquidity is related to the non-availability of:

(a) Goods and services

(b) Gold and silver

(d) Exportable surplus

June 4, 2024

Can domestic MFs invest in their overseas counterparts?

Why in the news?

SEBI issued a consultation paper, proposing a framework to enable domestic Mutual Funds (MFs) to invest in their overseas counterparts or Unit Trusts (UTs) that allocate a portion of their assets to Indian securities.

About the Framework for Facilitating Investments by Domestic Mutual Funds (MFs)

Aim: To clarify the process and regulations surrounding such investments to encourage domestic MFs to diversify globally while maintaining limited exposure to Indian securities.

About the Proposals:

On Investment Cap: SEBI proposes that overseas instruments being considered for investment by domestic MFs must not have more than 20% exposure to Indian securities.
- This cap is intended to balance facilitating global investments while preventing excessive exposure to Indian markets.
On Pooling of Contributions: Indian MFs must ensure that all investors of the overseas MF/UT pool their contributions into a single investment vehicle. This ensures fair distribution of gains among investors, proportional to their contributions, without any preferential treatment.
On Autonomous Management: Investments must be made autonomously by the manager of the overseas instrument, without influence from investors or undisclosed parties, to avoid conflicts of interest.
About Transparency and Disclosure: SEBI requires periodic public disclosures of the portfolios of such overseas MF/UTs for transparency.
No Advisory Agreements: SEBI warns against any advisory agreement between the Indian MF and the overseas MF/UT to prevent conflicts of interest and avoid undue advantage.
On Observance Period: If an overseas instrument breaches the 20% limit, the Indian MF scheme will enter a six-month observance period for rebalancing the portfolio.
- Further investments will only be allowed when the exposure is below the limit. If not rebalanced within six months, the MF must liquidate its investment in the overseas instrument.

Impacts of the Regulation

Diversification of Opportunities: The framework provides a structured path for Indian MFs to invest in overseas instruments, enhancing diversification opportunities for Indian investors.
Market Transparency: The requirement for periodic public disclosures of portfolios will increase transparency and investor confidence in overseas investments.
Risk Management: The 20% exposure cap and autonomous management of investments help mitigate risks associated with excessive exposure to Indian securities and conflicts of interest.
Compliance Burden: The need to adhere to strict regulations and rebalance portfolios within specified periods may increase the compliance burden on domestic MFs.
Potential for Growth: By facilitating global investments, the framework can potentially attract more investors to Indian mutual funds, contributing to the growth of the mutual fund industry in India.

What are the concerns associated with this framework?

RBI’s Upper Limit: The Reserve Bank of India’s (RBI) upper limit for overseas investment by mutual funds poses a concern. RBI Governor Shaktikanta Das indicated there are no plans to increase this limit, which means the overall industry limit for overseas investments is already exhausted.
Practical Impact: As the industry limit for overseas investments is effectively exhausted, the changes to regulations may not have an immediate practical impact, limiting the diversification opportunities for Indian investors.
Implementation and Compliance: Ensuring compliance with the 20% exposure cap and other regulations may pose challenges for domestic MFs, requiring careful monitoring and management of their overseas investments.

Conclusion: Need to establish collaborations with global investment firms to gain insights and best practices in managing overseas investments. Learning from established global players can help Indian mutual funds navigate the complexities of international markets more effectively.

Mains PYQ:

June 3, 2024

What Grade of Coal does India Produce?

Why in the News?

A report by the Organized Crime and Corruption Reporting Project suggests Adani Group claimed ‘low grade’ coal imported from Indonesia to be ‘high quality’ coal.
- They inflated its value and sold it to Tamil Nadu’s power generation company, TANGEDCO (Tamil Nadu Generation and Distribution Company).

Coal Gradation in India

These terms are relative and depend on the coal’s Gross Calorific Value (GCV denoted in kilo-calories per kg), which indicates its energy generation potential. Higher GCV denotes better quality coal.

High-Grade (GCV > 7,000 kcal/kg) to
Low-Grade (GCV 2,200-2,500 kcal/kg).

Overall there are 17 grades of coal according to the Coal Ministry‘s classification.

Characteristics of Indian Coal:

Historically, Indian coal is high in ash content and low in calorific value compared to imports.
Higher ash content leads to increased emissions of particulate matter and pollutants.

Clean Coal Technologies:

Coal Washing: On-site processes such as coal washing are employed to reduce ash and moisture content, thereby improving energy efficiency and reducing environmental impact.
Coal Gasification:
- Another approach is coal gasification, where coal is converted into syngas through an integrated gasification combined cycle (IGCC).
- This process enhances efficiency and reduces emissions compared to traditional coal-burning methods.
- Coal gasification produces a mixture of gases known as syngas, primarily composed of carbon monoxide (CO), hydrogen (H2), and carbon dioxide (CO2).
- Other gases present in syngas can include methane (CH4) and water vapor (H2O).

Coal Reserves in India

India boasts the fourth-largest coal reserves globally, totaling nearly 319.02 billion tonnes.
Geological Distribution: These reserves are primarily located in:

Older Gondwana Formations: in Peninsular India, about 250 million years old.
Younger Tertiary Formations: in the North-Eastern region, 15 to 60 million years old.

Gondwana coal constitutes 99% of India’s coal production.
The top 5 States in terms of total coal reserves in India are: Jharkhand > Odisha > Chhattisgarh > West Bengal > Madhya Pradesh.
Types of Coal found:
- Anthracite: This highest-grade coal contains 80-95% carbon and is found in smaller quantities in regions of Jammu and Kashmir.
- Bituminous: A medium-grade coal with 60 to 80% carbon content, it is abundant in Jharkhand, Odisha, West Bengal, Chhattisgarh, and Madhya Pradesh.
- Lignite: The lowest-grade coal, with 40 to 55% carbon content, is found in regions of Rajasthan, Tamil Nadu, and Jammu & Kashmir.

Status of Coal in India

In the fiscal year 2023-24, India’s coal production peaked at 997 million tonnes, primarily sourced from state-owned Coal India Ltd and its subsidiaries. Coking coal accounted for 58 million tonnes.
During the first quarter of 2024, renewable energy constituted 71.5% of India’s unprecedented 13.6 GW power generation capacity addition, signalling a notable departure from reliance on coal.

Coal Import Trends:

- Reduction in Share: The share of coal imports in India’s total coal consumption decreased to 21% from April 2023 to January 2024, down from 22.48% in the corresponding period of the previous year.
- Blending and Power Plant Imports: While there was a significant reduction of 36.69% in coal imports for blending by thermal power plants, imports by coal-based power plants surged by 94.21% during the same period.

Reasons for Coal Imports:

- Quality Constraints: The scarcity of good quality coking coal, essential for steelmaking, necessitates coal imports to meet industrial demands.
- Rising Energy Demand: Coal remains a vital component of India’s energy mix, prompting the need for imports to fulfil growing energy requirements.
- Infrastructure Challenges: Challenges such as geological constraints, land acquisition issues, and environmental regulations impede domestic coal production
- Quality and Cost Considerations: Importing coal can offer cost advantages and access to better-quality coal compared to domestic sources

PYQ:

[2020] Consider the following statements:

Coal ash contains arsenic, lead and mercury.
Coal-fired power plants release sulphur dioxide and oxides of nitrogen into the environment
High ash content is observed in Indian coal.

Which of the statements given above is/ are correct?

(a) 1 only

(b) 2 and 3 only

(d) 1, 2 and 3

June 3, 2024

Surge in Indian Companies’ External Commercial Borrowings (ECBs)

Why in the News?

Indian companies “external commercial borrowings” nearly doubled in FY24, reaching $49.2 billion, according to RBI data.

Key Statistics:

Disbursements: ECB disbursements stood at $38.4 billion in FY24, a significant increase from $23.8 billion in FY23, underscoring the growing reliance on overseas markets for funding.
Domestic Pressure: High interest rates in the domestic system have led to increased pressure, prompting companies to explore ECBs as a viable funding alternative.

External Commercial Borrowing (ECBs) in India:

	Details
Definition	Loans provided by non-resident lenders in foreign currency to Indian borrowers.
Usage	Widely used by Indian corporations and PSUs to access foreign funds.
Instruments Covered	Commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments (floating rate notes, fixed-rate bonds), credit from official export credit agencies, and commercial borrowings from multilateral financial institutions.
Regulation	Monitored and regulated by the Department of Economic Affairs (DEA) under the Ministry of Finance, Government of India, along with the Reserve Bank of India.
Contribution	Contributed between 20 and 35% of total capital flows into India in 2012.
Recent Changes	RBI raised ECB limit for infrastructure finance companies from 50% to 75% of owned funds.
Guideline Changes	RBI allowed all eligible borrowers to raise ECB up to USD 750 million per financial year under the automatic route (2019).
Utilisation of Funds	25% of ECB can be used to repay rupee debt; 75% should be allocated for new projects.
Regulatory Framework	Governed by the Foreign Exchange Management Act, 1999.
Routes for Raising ECBs	Automatic Route and Approval Route. Automatic Route: Cases examined by AD (Authorized Dealer) Category-I Banks. Approval Route: Borrowers submit requests to RBI through their AD banks for examination.
Maturity Period	ECBs can only be raised for a specific period known as the Minimum Average Maturity Period (MAMP).
Advantages Offered	ECBs offer the opportunity to secure substantial funding. These funds typically come with longer-term repayment options. Interest rates on ECBs are generally lower compared to domestic borrowing rates. ECBs are denominated in foreign currencies, providing corporations with access to foreign currency to fulfil import needs such as machinery procurement.

PYQ:

[2019] Consider the following statements :

Most of India’s external debt is owed by governmental entities.
All of India’s external debt is denominated in US dollars.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

June 1, 2024