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Samachar lehar feb2012 Samachar lehar feb2012 Document Transcript

  • February 2013
  • Samacher Lehar- February 2013 IssueSl. No Topic/Sub-Topic Page No.1. Our Bank in News 02 Third Quarter Review of Monetary Policy 2012-13 Statement by Dr. D.2. 7 Subbarao, Governor, Reserve Bank of India3. KHAS BAAT 134. Agriculture & Other Priority 215. BASEL 236. Bonds & Money Market 257. Credit Growth 258. CARD 279. Deposits 2810. Liquidity 3011. Minsitry of Finance 3012. Forex Inflows 3313. Housing Worries 3314. Human Resources 3415. Inflation 3616. Infrastructure 3617. Insurance 3718. Mutual Funds & Capital Market 3719. NPA 4020. Other Banking News 4421. 4922. RBI Directives & Guidelines 5023. ` Movement 5324. Technology 5325. Random Payment System Issues of Systemic Relevance for the New Year 55 A Revolution in Monetary Policy Lessons in the Wake of the Global26. 63 Financial Crisis27. Consultative Paper on Review of Corporate Governance Norms in India 8728. FAQs on RBI as Banker to Government 12229. Promoting Retail Investor Participation in Government Bonds 12530. FAQs on Central Depository Services (India) Limited 134 The Magical World of Mathematics - The Charm, Challenges and Career31. 145 Prospects32. Financial Inclusion of Urban Poor in India 15433. RBI to issue norms for companies merging with overseas firms via IDRs 16334. RBI cautions banks charging high prices on products 16435. RBI to address long-pending grievance of MSME sector 164 Foreign investments should be allowed into Alternative Investment Funds36. 165 : approval seeked by Sebi Existing rules on insider trading to be synced with the guidelines of37. 166 Companies Bill : Sebi38. Post Bank of India to be established soon 16839. RBI likely to finalise norms for NBFCs this month 168 Listed Companies should Disclose data as per clause 36 of the Listing40. Agreement : Sebi 169
  • Canara Bank Samachar Lehar February 201341. SEBI proposes tougher norms for corporate governance 17042. Working group set up to resolve consumer complaints : RBI 17143. New rules expected for taking foreign tax credit from 2013-14 17144. RBI relaxes overseas borrowing limit for NBFC- IFCs 17245. Tax recovery norms get stricter from 01-01-2013 173 FinMin likely to discuss the controversial tax rules in parliament next46. 174 month47. Sebi is likely to propose stringent public shareholding norms 17548. RBI might consider bringing down G-Secs to be held under HTM 17649. Sebi notifies regulations for setting up a SRO to monitor MF distributors 17750. New set of guidelines for consent order mechanism : Sebi 17851. Investors should not fall for fraud regulatory calls : Sebi 17852. Banking Ombudsman Scheme to be reviewed, updated and revised : RBI 17953. Irda board approves the new product guidelines 18054. Irda releases exposure draft on Standardization in Health Insurance 18155. Sebi eyes 24/7 monitoring through IMSS 183 Comments on final norms for new banking licenses submitted to RBI :56. 184 FinMin57. Implementation of GAAR postponed to 01-04-2016 18558. Swap Facility for Expansion of Export Credit in Foreign Currency 18659. Banking facilities in small towns soon 18660. Budget might include the constitutional amendments on GST : FM 18761. Capital adequacy norms should be relaxed : FinMin to Rbi 18862. No registration fee for registrations of new distributors : Amfi 18863. Govt. to consider proposal for setting up holding company for PSU banks 18964. CCEA authorises NIF to buy public cos shares 19065. CBDT clarifies onsite software development not taxable 19266. Debt segment on bourses : Sebi 19367. Sebi relaxes IDF regulations, margin requirement under offer for sale 19468. Real estate, broking firms should be allowed to set up banks : FinMin to RBI 19569. PSUs may not be allowed to issue tax-free bonds in FY14 : FinMin 19670. Sebi notifies Investment Advisers Regulation, 2013 19771. Funds used for IPO should be scrutinized by monitoring agency : Sebi 19872. FinMin to approach cabinet for creation of debt management office 19973. Govt. likely to increase the annual agricultural lending target 20074. Banks should offer 30-year fixed rate home loan : RBI panel 20175. Insurance regulator releases framework for monitoring insurance frauds 20276. Budget 2013-2014 aims at providing Investor-friendly India : FM 20277. Aadhaar must for new EPFO accounts 20378. RBI committee lays down their recommendations for PACS 20479. EPFO is likely to roll back the mandate of furnishing Aadhaar number 20580. Investment ceiling for insurers should be 5% in group companies : IRDA 20681. RGESS to be launched on February 9, 2013 : FinMin 20682. MCX-SX will commence live trading in equities from February 11 20783. Govt may agree with Shome committee on retro tax 20884. RBI to issue inflation-indexed bonds to wean investors off gold 20985. Centre refuses the proposal of uniform GST rates 21086. Key Banking Indicators 211 1 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 OUR BANK IN NEWSOur New C&MD:Sri Rajiv Kishore Dubey, has taken over as Chairman & Managing Director of CanaraBank on 11th January 2013. A professional banker par excellence, Sri Dubey carries withhim vast knowledge and multi-dimensional banking experience, spanning over threedecades. His key areas of expertise include planning and budgeting, resource mobilization,credit, risk management, HR, IT and marketing. A post graduate in English, Sri Dubeyacademic credentials also include LLB, MBA in HR and a Certified Associate of the IndianInstitute of Bankers. Born on 10.09.1954, he joined Punjab National Bank in the year 1977as a Management Trainee and moved up to the ranks of a General Manager in 2008 andwas appointed as an Executive Director of Central Bank of India in 2010. Amongst themany awards, he Best Bankers Awardcontributions in SME Sector by the SME Chamber of India. Sri R K Dubey is certain to bringto bear his rich fund of experience to his new assignment as Chairman & ManagingDirector of our bank. Canara Bank Welcomes our new C&MD & wishes him the verybest in his tenure at our bank. (HM&L Section, HR Wing, HO)CAM Training to Vijaya Bank Staff:A weeklong prestigious Credit Training Programme to the Officers and Managers of Vijaya Bank was launched at StaffTraining College, Bangalore by Smt. Mythili Krishnamurthy, GM and Sri Lalit Vaid, GM &Principal. The programme was inaugurated by Sri H Upendra Kamath, C&MD, VijayaBank. He profusely appreciated and thanked Canara Bank for its generosity and co-operation in extending this Credit Training Programme to the staff of Vijaya Bank.Secretariat, STC, Bangalore)Cash Subsidy Transfer Scheme:To launch the services under the Cash Subsidy Transfer Scheme, Smt Archna S Bhargava,ED, met the Honble Finance Minister of Kerala, Sri. K M Mani on 02.01.2013 and apprisedhim of the progress made in Wayanad and Pathanamthitta Districts of Kerala under thescheme. She also conveyed the Sanction for Rs. 500 Cr Paddy Crop Loan to farmersregistered with SUPPLYCO at a concessional rate of interest at 4 % for loans up to Rs 3to Unemployed Youth under Kerala State Self Entrepreneurship Development Mission.reduced substantially to help the students and the MSME loan rate has also been lowered.In this regard, she attended a programme along with Kum. P K JayalakshmiMinister for welfare of ST, Youth Affairs, Museum and Zoos, Govt of Kerala at Kalpetta, 2 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Wayanad Dist. of Kerala to launch Direct Cash Transfer Scheme. Further, she distributedPass Books and ATM Cards to the beneficiary ST students under Post-Matric scholarship.Sri S S Bhat, GM, PC&FI Wing, HO also participated in the event. (CC&PR Section, CC&BPWing, HO)Canara Utsav:CED Cell for women, HO is organizing Canara Utsav, an exhibition-cum-sale of productsmanufactured by women entrepreneurs at Vidyaranya Prarthana Mandira, Sri AvaniSringeri Shankar Mutt, Mahalakshmipuram, Bangalore. Smt Jija Madhavan Harisingh,IPS, Director General of Police (Retd), Home guards & Fire Force, Government of Karnatakawill inaugurate the utsav. The function will be presided over by Sri K S Prabhakara Rao,GM, PC&FI Wing, HO. (CED Cell for Women, RD Section, HO)Cash Subsidy Transfer Scheme:In a function organized by our bank at Sira, Tumkur Dist, Sri K H MuniyappaMinister of State for MSME, Govt of India launched Direct Cash Transfer scheme underPost Matric Scholarship for SC Students of the district. Sri Sogadu ShivannaMinister of Planning, Statistics & Environment, Govt of Karnataka presided over thefunction. Sri G S Basavaraj, MP, Sri T B Jayachandra, MLA and other dignitaries werepresent. Smt Archna S Bhargava, ED, along with Sri S S Bhat, GM, PC&FI Wing, HO, SriRavindra Bhandary, GM, Bangalore Metro, and Sri G S Hoolikatti, DGM, Bangalore Ruralrepresented our Bank. (CC&PR Section, CC&BP Wing, HO)Sri A K Gupta, ED inaugurated the renovated premises of Call Centre operating fromNaveen Complex, on 04.01.2013. Smt Shantha Rangaswamy, GM, Retail BankingDivision, while explaining about the development, she said the renovated premises cannow accommodate 84 agents at a time. (Retail banking Wing, HO)Canara Utsav:CED Cell for Women, HO has organized a Canara Utsav, an exhibition-cum-sale ofproducts manufactured by women entrepreneurs. After having been inaugurated on04/01/2013, the Canara Utsav willl continue for 2 more days up to 06.01.2013 atVidyaranya Prarthana Mandira, Sri Avani Sringeri Shankar Mutt, Mahalakshmipuram,Bangalore. (CED Cell for Women, RD Section, HO)Canbank VC to deploy big part of Rs 500 cr corpus in 2013:Canbank Venture Capital Fund Ltd, the wholly-owned subsidiary of Canara Bank, is set todeploy a major portion of the present fund -- Emerging India Growth Fund (EIGF) during2013. While Canara Bank is the anchor investor in EIGF with Rs 100 crore, other maininvestors include the Oriental Bank of Commerce, IFCI, SIDBI among 18 public sector banksand institutions. Canbank Venture Capital is at present investing from its fifth fund, EIGF,with an existing corpus of Rs 455 crore and plans to raise the remaining from institutionalinvestors so as to take the total corpus of the fund to the targeted level of Rs 500 crore.Depending on the pace of the investments, which will pan out during 2013, the fundmanagers may also seek in extension of the fund life by a year. (BS dt. 05.01.2013 p5) 3 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013At IIT Bombay, tech takes the cash out of shopping:A cashless world is no longer a theory at the Indian Institute of Technology-Bombay (IIT-B).Thanks to a novel initiative, shopping here is all about a tap on their mobile phones. The Canara Bank av S. Joshi, Head,Government Business, ItzCash. About 2,000 students are using this cashless card initiativesystem in an educational institution. We aim to extend it to 4,000 students in the next (BL dt 07.01.2013 p.1)Canara Utsav:Canara Utsav, an Exhibition - cum sale, organized by CED for Women, HO, at Bangalorefor 3 days from 04.01.2013 to 06.01.2013 was a grand success. Sale to the tune of Rs 5lakh was achived by the women entrepreneurs from around 52 stalls they had put up.GMs from HO Sri K S Prabhakar Rao, and Smt Lalitha Lakshmanan, visited the stalls. SmtK Suseela, AGM, PC & FI Wing, HO distributed the certificates to the participants. (CED forWomen, PC &FI Wing, HO)Vigilance Study Circle:Vigilance Study Circle, Bangalore, as a part of Vigilance Awareness Week 2012, organizeda Quiz competition for students of various Schools in Bangalore on 8th January 2013 atHead Office Auditorium. About 45 students from 15 Schools in and around Bangaloreparticipated. Sri A K Gupta, ED distributed the prizes and also spoke on the occasion. Ms.Bhanu Raman, GM & CVO, Canara Bank, Sri M N Krishnamurthy, CVO, BEL, Ms. KavithaKestur, CVO, BEML, and CVOs of Public Sector Undertakings and executives of our bankwere present. (Vigilance Wing, HO)Cash Subsidy Transfer Scheme:Our bank launched the Direct Cash Transfer in Mysore District on 09.01.2013 at TNarasipura, for students. Smt. Archna S. Bhargava, ED launched the program atGovernment Girls High School, T Narasipura and distributed Passbooks to beneficiarystudents and also distributed School bags & notebooks to poor students. She explainedthe initiatives taken by our bank under the Direct Cash Transfer programme. The programwas attended by Shri S.S. Bhat, GM, PC & FI Wing, HO. He explained about the schemeand benefits available to the beneficiaries with the implementation of Direct CashTransfer scheme. Various scholarship schemes are handled by Social Welfare Departmentof the State Government which has about 25000 beneficiaries in Mysore Dist. As per therequirement of Ministry of Finance, accounts of all the 25000 beneficiaries have alreadybeen opened with Bank branches. Shri. K Mahadeva, Head Master, Government Girls HighSchool, T Narasipura applauded Canara Banks efforts in implementing Centralway for others. He also requested other Banks to follow Canara Bank to reach the benefitto the last Mile Customers. All Banks in the District have been actively opening accountsto ensure that each household has a Bank account and also that each beneficiary of theschemes too have a Bank account. Mysore District has 6.88 lac households and Banks haveopened over 24.30 lac saving bank accounts. In the 16 schemes selected for 4 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013implementation in the District, about 34039 beneficiaries are covered. About 29476accounts of beneficiaries have been opened . In Karnataka, our bank has more than 700branches and Pragathi Gramin Bank, our bank sponsored RRB has got 410 branches. InMysore District, Canara Bank has 29 branches with 79 service area villages and 12 wards.During the campaign period, more than 10000 accounts have been opened taking thetally of accounts to more than 43000. (CC&PR Section, CC&BP Wing, HO)Canara Bank revises deposit rates:Canara Bank has revised interest rates on deposits of less than Rs 15 lakh, with effect fromJanuary 18, 2013. The revised rates for deposits held for 180 to 269 days is 7.50 per centfor domestic and NROs, 9% for deposits held from 270 days to less than 1 year. For 1 to 10years, it is 9.05%. For NRE deposits, the revised rate is 9.05% for 1 to 10 years. Additional0.50% is applicable to senior citizens on domestic deposits. Further, Canara Tax SaverDeposit, a tax saving instrument under section 80 C, fetches interest of 9.05% with amaturity period of five years. (DH dt. 18.01.2013 p.17) (News item also appears in p.4 ofBusiness Standard)Skill training:Help Group members supported by the Vishalakshi Mahila Vividhyodesha Co-operativeSociety, Bengaluru. The three days long programme concluded on Saturday. SriVenkataswamy Naidu, Corporator, Chief Guest for the valedictory programme, applaudedthe efforts of the Bank. Sri Sunil S Kurtkoti, DGM, PC&FI Wing and Smt K Suseela, AGMwere present on the occasion. (CC&PR Sec, CC&BP Wing, HO)Republic Day celebrations:Republic Day was celebrated with traditional fervor and patriotic flavor on 26th at HO. SriR K Dubey, C&MD unfurled the national tricolor. While addressing the gathering heemphasized that the bank would live up to its founding principles of removing illiteracy,spreading education to all with special care for women and poor. On this occasion Sri R KDubey, honored eminent personalities like Padmshree Chittani Ramachandra Hegde, aYakshagana Doyen, Dr Narayan Sawanth, Homeopath healer, Sri M G Kivadasannavar,Founder of Samarthanam Trust for disabled and Padmashree Anitha Reddy, Foundertrustee of AVAS. Along with the above persons, Master Karan Prasad and Sri C Veerannawere honoured for bravery. Few other achievers in the field of arts, sports and culture andmeritorious students from lower strata of society were also felicitated. Bank donatedmedical kits to Rangadore Memorial Hospital and Shri Shanakara Eye Hospital and Rs25,000 to Master Ranganath, a blind boy aged 11 years for his medical treatment. Sri P VMaiya, Director also graced the occasion. (CC&PR Sec, CCBP Wing, HO)e-Lounge:Our C&MD Sri R K Dubey -do most of the basic transactions without any manual intervention on 26th January 2013at Koramangala Branch, Bangalore. (CC&PR Sec, CCBP Wing, HO)Canara Bank to open 2,000 ATMs:Canara Bank said it would open 2,000 ATMs by March 2014, taking the total number ofcash dispensing machines to over 5,000 by the end of next fiscal. (BS dt.29.01.2013 p.4) 5 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 -Sri A K Gupta, -Delhi on 28.01.2013. Also as a part of our CSR activity he donated wheel chairs/Tricycles topoor and physically challenged persons on this occasion. Sri T Sreekanthan, GM, CO Delhiand Sri S Jayakumar, AGM of the branch along with many staff were present for the event.(CCPR Sec, CCBP Wing, HO) 6 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Third Quarter Review of Monetary Policy 2012-13 Statement by Dr. D. Subbarao, Governor, Reserve Bank of India"First of all, on behalf of the Reserve Bank, a warm welcome to you all to this Third QuarterReview of Monetary Policy for 2012-13.2. Earlier this morning, we put out the Policy Review document. Based on anassessment of the current macroeconomic situation, we have decided to reduce the policyrepo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per centto 7.75 per cent.3. Consequent to this, the reverse repo rate under the LAF, determined with a spreadof 100 basis points below the repo rate, gets calibrated to 6.75 per cent. Similarly, themarginal standing facility (MSF) rate, determined with a spread of 100 basis points abovethe repo rate, and also the Bank Rate stand adjusted to 8.75 per cent.4. These changes have since come into effect immediately after the announcement.5. We have also decided to reduce the cash reserve ratio (CRR) of scheduled banks by25 basis points from 4.25 per cent to 4.0 per cent of their net demand and time liabilities(NDTL) effective the fortnight beginning February 9, 2013.6. This reduction in the CRR will inject primary liquidity of around 180 billion into thebanking system.Considerations Behind the Policy Move7. Todays decision to further ease the monetary policy stance was informed by threeconsiderations.8. First, both headline wholesale price inflation and its core component, non-foodmanufactured products inflation, have softened through the third quarter. This providedsome relief from the persistence that dominated the first half of the year. Severalindicators such as the weaker pricing power of corporates, excess capacity in somesectors, the possibility of international commodity prices stabilising as well as inflationmomentum measures suggest that inflationary pressures have peaked. However, furthermoderation in inflation going into the next fiscal year is likely to be muted as thecorrection of under-pricing of administered items is still incomplete and food inflationremains elevated. Accordingly, the setting of monetary policy has to remain sensitive tothese conflicting pressures and attendant risks.9. Second, growth has decelerated significantly below trend through the last fiscalyear and through this year so far, and overall economic activity remains subdued. On thedemand side, investment activity has been way below desired levels and consumptiondemand too has started to decelerate. External demand has also weakened due to languidglobal growth. On the supply side, constraints in the availability of key raw materials andintermediates are becoming binding. While the series of policy measures announced bythe Government has boosted market sentiment, the investment outlook is still lacklustre,especially in terms of demand for new projects.10. The third consideration that informed our decision is that liquidity conditions haveremained tight. Although the Reserve Bank lowered the cash reserve ratio, CRR,successively in September and October 2012, and carried out open market operations(OMO) injecting systemic liquidity of 470 billion during December and January to 7 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013augment liquidity, the average net LAF borrowings at 910 billion in January have beenabove the Reserve Banks comfort level. This tightness could potentially hurt credit flow toproductive sectors of the economy. The structural deficit in the system provided a strongcase for injecting permanent primary liquidity into the system.Monetary Policy Stance11. The policy document also spells out the three broad contours of our monetarypolicy stance. These are :* first, to provide an appropriate interest rate environment to support growth asinflation risks moderate;* second, to contain inflation and anchor inflation expectations; and* third, to continue to manage liquidity to ensure adequate flow of credit to theproductive sectors of the economy.Guidance12. As has become standard practice by now, we have also given the followingguidance for the period forward :13. With headline inflation likely to have peaked and non-food manufacturedproducts inflation declining steadily over the last few months, there is an increasinglikelihood that going into 2013-14, inflation will remain range-bound around the currentlevels. This provides space, albeit limited, for monetary policy to give greater emphasis togrowth risks. This policy guidance will, however, be conditioned by the evolving growth-inflation dynamic and the management of risks from the twin deficits.Expected Outcomes14. We expect that todays policy actions, and the guidance that we have given, willresult in the following three outcomes :* first, investment will be encouraged, thereby supporting growth;* second, medium-term inflation expectations will remain anchored on the basis of acredible commitment to low and stable inflation;* and, finally, there will be an improvement in liquidity conditions to support credit flow.Global and Domestic Developments15. Our policy decisions have been based on a detailed assessment of the global anddomestic macroeconomic situation. Let me comment first on the global outlook.Global Economy16. Since the Reserve Banks last Quarterly Policy Review in October 2012, headwindsholding back the global economy have begun to abate gradually, although sluggishconditions prevail. In the US, activity gathered momentum in the third quarter of 2012 butthis is unlikely to have been sustained in the fourth quarter. While a political consensus toavert the fiscal cliff has calmed financial markets, how the debt ceiling is managed willbe crucial in shaping the market sentiment on the way forward. The euro area economy isthreatened by continuing contraction, notwithstanding the liquidity firewall of theEuropean Central Bank (ECB) and the EUs commitment to act collectively to backstop theunion. Overall, however, apprehensions that the sovereign debt crisis will disrupt theglobal financial system have ebbed.17. A pick-up in the pace of growth of China is likely. But growth in other emergingand developing economies has slowed owing to a combination of a slump in externaldemand and domestic structural bottlenecks. Furthermore, inflationary pressures persistin some of them. Overall, global economic prospects have improved modestly since theReserve Banks last review in October 2012 even as significant risks remain. 8 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Indian Economy18. Moving on to the domestic economy, GDP growth slowed significantly this year,dropping to 5.5 per cent in the first quarter, and dropping even further to 5.3 per cent inthe second quarter. The decline in the GDP growth rate became more broad based, withconsumption demand also slowing alongside stalling investment and declining exports.19. In July 2012, the Reserve Bank projected GDP growth for the current year, 2012-13,of 6.5 per cent. In the October Review, we revised this downwards to 5.8 per cent,signalling increasing global risks as well as accentuated domestic risks. As part of thisreview, we revisited this growth projection taking into account developments over the lastthree months. During this period, industrial activity has remained subdued. Sluggishexternal demand continues to inhibit improvement in services. While the coverage of rabisowing has picked up, severe winter in certain parts of the country could affect cropprospects. New investment demand, which should be the key driver of an upturn,continues to be weak. While the series of recent policy initiatives by the Government hasboosted market sentiment, it will take some time to reverse the investment slowdownand reinvigorate growth.20. Accordingly, we have revised downwards our baseline projection of GDP growthfor the current year from 5.8 per cent to 5.5 per cent.Inflation21. Let me now turn to inflation. Headline WPI inflation eased significantly from 8.1per cent in September 2012 to 7.2 per cent by December. Notably, inflation on account ofnon-food manufactured products, which have a weight of 55 per cent in the WPI, fellsharply in November-December as input price pressures eased. The momentum indicatorstoo suggest a moderation in headline as well as non-food manufactured productsinflation. The Reserve Banks industrial outlook survey also points to a softening of therate of increase of output prices, suggesting that the pricing power of corporates hasweakened. Fuel group inflation moderated in December, mainly reflecting the temperingof inflation of non-administered petroleum products as well as the range-boundexchange rate of the rupee.22. Food inflation, on the other hand, showed a contrarian behaviour, moving intodouble digits in December, reflecting both cyclical and structural factors.23. In contrast to WPI inflation, CPI inflation as measured by the new consumer priceindex, rose to 10.6 per cent in December, largely reflecting the surge in food inflation.Excluding food and fuel groups, CPI inflation remained unchanged at 8.4 per cent duringthe third quarter.24. In the October Review, the Reserve Bank made a baseline projection of inflation forMarch 2013 of 7.5 per cent. An environment of slower growth and excess capacity in somesectors suggests that inflation has come off its peak. However, it is expected to be range-bound around the current levels due to persisting food inflation, the pass-through ofdiesel price adjustments over the next several months and the possibility of adjustment inother administered prices. If international commodity prices, including the price of crude,further decline, they should cushion the phased increase in diesel prices, to the extentthey are not offset by exchange rate movements. A sustained reduction in inflationpressure is, however, contingent upon alleviation of supply constraints and progress onfiscal consolidation. This will also help mitigate the cost-push pressures stemming fromthe surge in wages. 9 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201325. Keeping in view the expected moderation in non-food manufactured productsinflation, domestic supply-demand balances and global trends in commodity prices, werevised downwards the baseline WPI inflation projection for March 2013 from 7.5 per centto 6.8 per cent.Monetary and Liquidity Conditions26. Let me now turn to monetary and liquidity conditions. Money supply remainedbelow the indicative trajectory of the Reserve Bank. This essentially reflected thedeceleration of growth in aggregate deposits and moderation in economic activity. On theother hand, the overall non-food credit growth was around the indicative trajectory.However, bank credit to industry showed a significant deceleration while credit toagriculture registered an increase.27. Keeping in view the seasonal pattern for the last quarter, M3 growth projection forthe current year has been scaled down to 13.0 per cent while non-food credit growthprojection is retained at 16.0 per cent.28. Liquidity conditions tightened from the second week of November on account of abuild-up in the Centres cash balances, festival-related lumpy increase in currencydemand, and structural pressures brought on by the widening wedge between depositgrowth and credit growth. Anticipating liquidity pressures, the Reserve Bank lowered theCRR and conducted open market operations. Despite these measures, the liquidity deficitin the system remained above the Reserve Banks comfort level.Risk Factors29. Macroeconomic management going forward is subject to a number of risks. Letme briefly address them.* First, the widening of the current account deficit (CAD) to historically high levels,especially in the context of a large fiscal deficit and slowing growth, exposes the economyto the twin deficit risk. Financing the CAD with increasingly risky and volatile flowsincreases the economys vulnerability to sudden shifts in risk appetite and liquiditypreference, potentially threatening macroeconomic and exchange rate stability. Largefiscal deficits will accentuate the CAD risk, further crowd out private investment and stuntgrowth impulses.* Second, despite the recent calm, global risks remain elevated, with the potential forspillover into the Indian economy through trade, finance and confidence channels. In theUS, the risk of political inaction to manage the debt ceiling or even a sudden onset of fiscalausterity can lead to a turmoil in financial markets, followed by a downturn in economicactivity. Escalation of the euro area sovereign debt stress in view of the continuingabsence of credible and comprehensive policy responses remains a contingent global risk.Risks also stem from geopolitical tensions that can adversely impact supplies and prices ofkey commodities, particularly of crude oil. Furthermore, these forces can potentiallyincrease global risk aversion with implications for financing of our CAD.* Third, inflation over the last three years has been a result of demand pressures as wellas supply constraints. With demand pressures now on the ebb, the supply constraintsneed to be urgently addressed. In the absence of an effective supply response, inflationarypressures may return and persist with adverse implications for macroeconomic stability.* Fourth, the key to stimulating growth is a vigorous and sustained revival in investment.Achieving this will, however, depend on a number of factors such as bridging theinfrastructure gaps, and resolute pursuit of structural and governance reforms. 10 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013* Finally, risk aversion in the banking system stemming from concerns relating togrowing non-performing assets (NPAs) is constraining credit flow. Notwithstanding theimportance of repairing asset quality, banks should be discerning in their loan decisionsand ensure adequate credit flow to productive sectors of the economy.30. Let me conclude by summarising our macroeconomic concerns. Inflation has comeoff from its peak, but its further downward movement is going to be slow and gradual. Onthe other hand, economic activity has slowed, trailing well below its potential andopening up a negative output gap. What the economy needs most of all and mosturgently is new investment. This will step up currently flagging aggregate demand andalso ease the supply constraints so that existing capacity is fully utilised and new capacityis built up. A strong and effective supply response is particularly important for bridgingthe infrastructure gaps and correcting structural imbalances in other segments of theeconomy, including key food articles. Critical to this effort are a credible andcomprehensive fiscal adjustment by the Government, implementation of structuralreforms, hastening the approval process, and improving governance to inspire the trustand confidence of potential investors. The Reserve Bank, on its part, will have to calibratemonetary policy to the evolving growth-inflation dynamic and the management of thetwin deficits risks. 11 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 ***** 12Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 KHAS BAAT…..Lenders ask Kingfisher to bring at least Rs.800 cr:A core group of lenders asked grounded Kingfisher Airlines Ltd to infuse at least Rs.800crore into the carrier before the banks considered any further loan recast and theextension of a no-objection certificate (NOC) that would enable the airline to resumewill meet again by the end of this month to take a final call. Until and unless we give a no-objection certificate, DGCA (Directorate General of Civil Aviation, the regulator) will not (Mint dt. 19.01.2013 p.12)Norms for issue of commercial paper eased:In a bid to make Commercial Papers (CPs) attractive, the RBI has allowed issuers tobuyback these instruments before maturity. The central bank, in its directions on CP, hasalso diluted by a notch the minimum credit rating requirement for CPs so that morecompanies can tap this route to meet their short-term funding requirements for theiroperations. A CP is an unsecured money market instrument issued in the form of apromissory note. (BL dt. 03.01.2013 p.11)RBI panel suggests gold-backed products:To curb gold imports and bring down trade deficit, a RBI panel has suggested a host ofdemand reduction, supply management and gold monetisation measures. The panelwants higher import duty on gold imports. However, it also cautioned that beyond a level,raising the import duty may lead to buyers turning to unauthorised sources.Documentation of gold sales and purchases has been emphasised. The panel hassuggested that carrying of gold and jewellery by Indians coming from abroad could bemade a less attractive option. (BL dt. 03.01.2013 p.1)Stiglitz not in favour of biz houses owning banks:Nobel laureate economist Joseph Stiglitz has expressed discomfort at the idea of allowingcorporate houses to own banks, saying this amounted to conflistatement comes at a time when the corporate sector is gearing up to foray into thebanking sector, with the RBI set to release the final guidelines in this regard. Earlier, thegovernment had said the central bank would consider giving banking licences to non-banking financial companies and industry houses. (BS dt. 04.01.2013 p.5)Draft norms on lending against gold seen easing investors fears:The draft norms on lending against the yellow metal appear to have placated investoconcerns, as shares of gold loan companies surged by 10-20 per cent in Thursdays trade. Aworking group of the RBI, under the chairmanship of Mr KUB Rao, admitted there is a needto increase monetisation of idle gold stocks in the economy for productive purposes. Itsuggested a higher loan-to-value ratio for gold loan companies (75% versus 60%) that willallow NBFC to lend more money against gold securities. (BS dt. 04.01.2013 p.4)Regulations to restrict size of banks needed, says Stiglitz: 13 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Strong regulations are needed to restrict the size and interconnectedness of banks, MrJoseph Stiglitz, the 2001 Nobel Prize winner in economics said. It was believed that banksthat are too big or too interconnected cannot fail. However, the financial crisis of 2007-08has taught us different lessons, Stiglitz said in the 15th C.D Deshmukh Memorial lectureorganized by RBI to honour the memory of the first Indian governor of the central bank. o fail or too correlatedto fail have an incentive to gamble. If they win, they walk off with the profits, if they lose, (BL dt 05.01.2013 p.11)Govt has no loan dues from RBI:The Government had no loan dues from the central bank as of December 28, the RBI saidin its weekly statistical supplement on Friday. State Governments had borrowed Rs710Crore from the central bank in the week ended December 28. (BS dt 05.01.2013 p.3)Banking ombudsman: Customer complaints up marginally in FY12:Customer complaints in Banking Ombudsman offices of the Reserve Bank of Indiaincreased marginally to 72,889 in 2011-12. The numbers of complaints in the previousyear were 71,274. According to RBI, Kanpur and Delhi continued to receive the highestnumber of complaints followed by Chennai and Bhopal in 2011-12. While the number ofcomplaints rose marginally, the rate of disposal of complaints was same at 94 per centlike in the previous year. About 25 per cent of total complaints received pertained to thebanks failure to meet commitments and non-observance of fair practices code, while 21per cent were card-related (credit/debit/ ATM) complaints. (BS dt. 05.01.2013 p3)RBI sets up panel to review grievance redress mechanism:The RBI has set-up a working group to review and make improvements in the grievanceReserve Bank of India to review, update, and revise the Banking Ombudsman Scheme, -12, the bankingcustomer complaints in the same year, RBI said in its annual report of the BankingOmbudsman Scheme 2011-12. (BL dt. 06.01.2013 p.3)Give preference to non-corporate sector for new banking licences: Rangarajan:The RBI, while allotting new banking licences, should give preference to the non-corporatesector, said Mr C Rangarajan, chairmis possible for the Reserve Bank to initially start with non-corporate business and find outwhether there are suitable applicants and thereafter proceed to look at the other interview to PTI. RBI is in the process of finalising the guidelinesfor giving new bank licences. Parliament approved the Banking Laws (Amendment) Billlast month. (BS dt. 07.01.2013 p.16)Gold loans-RBI favours banks over NBFCs:A paper on gold loans by a RBI working group favours banks over NBFCs. Currently, NBFCsdevise lending formulae after taking into account the overall value of gold jewellery,which includes making charges, manufacturing loss, tax, etc. According to the paper,current RBI guidelines allow NBFCs to tweak the calculating method according to their 14 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013convenience, without the overall lending exceeding 60 per cent of the loan-to-value (LTV).(BS dt. 06.01.2013 p.6)Cut lock-in period for tax saving deposits to 3 years: Bankers:Bankers on Monday urged the Finance Minister Mr P Chidambaram to reduce the lock-inperiod for tax-saving deposits to three years from the current five years and allow them toissue tax-free bonds like other financial institutions to finance infrastructure projects.Citing rising NPAs due to the overall economic slowdown, bankers wanted tax incentiveson some categories of provisioning. Bankers also demanded tax concessions for issuingperpetual bond, which is counted as Tier I or equity capital for meeting Basel III norms. (FEdt. 08.01.2013 p.8)PSBs to lag behind private banks in Q3 earnings:Stable margins, stronger loan growth and better asset quality will help private sectorbanks outperform public sector banks (PSBs) yet again in the third quarter, according toanalysts. For public sector banks, an additional provisioning of 0.75 per cent, as directed bythe RBI, is likely to impact the earnings this quarter, say analysts. As far as interest incomeis concerned, public sector banks will lag behind private sector banks by about 7-8 percent with a marginal com- pression carried forward from the second quarter,said MrVaibhav Agrawal, Senior Analyst with Angel Broking. (BL dt. 09.01.2013 p.6)SBI for 2% interest on current account: r, State Bank of India, has recommended the Reserve Bank ofIndia that banks pay an interest of up to 2% on current accounts. SBI Chairman Mr PratipChaudhuri, said non-payment of interest on current accounts is an oppressive market hown boldness in opening up the saving bank interest market, (FE dt.09.01.2013 p.8)SBI not merging its associate banks this fiscal:State Bank of India is not looking to consolidate any of its associates with itself during theSaurashtra and State Bank of Indore with itself during the recent years. (BL dt. 09.01.2013p.6)Draft norms on bank CCP exposure out:central counter-parties (CCP) such as Clearing Corp of India. RBI has said banks will have tomaintain adequate capital with regards to their exposure to CCPs to protect potentialderivatives, exchange traded derivatives transactions and SFTs will be subject to thebuffer to the risk that a institution faces through exposure to the capital markets. (FE dt.11.01.2013 p.8)Financial Technologies, SBI, ICICI Bank sign MoUs: 15 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013SBI, ICICI Bank and Financial Technologies were among those that signed MoU withGujarat International Financial Tec-City (GIFT City) for setting up operations in the city.While Financial Technologies signed a MoU to set up a financial services training centre,SBI, ICICI BoB, HDFC and Dena Bank signed MoUs for setting up banking operations in thecity. GIFT City had launched a 29-storey tower and is set to launch a second tower in a fewmonths. These towers involve a construction cost of Rs 700 crore and are likely to housebanks such Bank of Baroda, Dena Bank and Syndicate Bank, said Mr R K Jha, director, GIFTCity. (BS dt. 13.01.2013 p.14)Bankers seek 50 bps cut in policy rates:Bankers requested the RBI for a sharp cut in its policy rate along with a cut in the cashreserve ratio, or the portion of deposits that lenders need to keep with the central bank.The RBI will review its monetary policy on 29 January. In the customary pre-policymeeting, chaired by RBI Deputy Governor Dr K.C. Chakrabarty, the lenders requested a 50bps cut in the RBI policy rate, presently at 8%. One bps is one-hundredth of a percentagepoint. HDFC Bank Ltd MD Mr Aditya Puri, talking to reporters after the meeting, saidbankers had demanded a 50 bps cut in policy rates. Banks do understand that a high rateof inflation in the economy has warranted high interest rates. Punjab National Bankhelp banks in lending more. (Mint dt. 16.01.2013 p.11)An ombudsman by a name that appeals to the common man:to something that the simple and appeals to the common man. In a recent meeting oncustomer service, some banks in a suggestion to the RBI, pitched for Customer Careofficers as a replacement. Hopefully, a change in the name would also lead to betterservice. (ET dt. 16.01.2013 p.19)IMF sounds warning on bank licence:The IMF has warned India against licensing corporate entities to step into the business ofcommercial banking, saying the risks associated with such a move potentially outweigh pdatesaid it would be prudent for India to first put in place and gain sufficient experience inimplementing a comprehensive framework for the purpose before considering the entry work forconsolidated supervision of both bank-led groups and financial conglomerates is stilltotal independence for the RBI from government influence. (Mint dt. 17.01.2013 p.1)Banks bank on consumers with highest credit rating:In a major indicator of the growing risk aversion among banks in a slowing economy, dataon lending to consumers with the highest credit rating and that too against securedscore of over 800. Around three years back, most banks were lending to consumers evenwith a score of 500-600. Post 2008, banks have started tightening their credit policies andreducing exposures primarily to unsecured debt like credit card and personal loans. There 16 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013is a shift towards secured products such as two- Mr ArunThukral, Managing Director of CIBIL said. (FE dt. 17.01.2013 p.2)The Finance Ministry has sought the opinion of the law ministry on a proposal to set up aholding company for all 24 PSBs. Such a move will need amendments to a number ofexisting acts, including the bank nationalization acts of 1969 and 1980 and the SBI ActThe setting up of a holding company, with an aim to recapitalise public sector banks, wasaim was to devise a mechanism to handle the growing capital requirements of PSBswithout straining the financesapproved. Setting up one holding company for all the PSBs will require amendments to ago to the cabinet in three- (Mint dt.17.01.2013 p.1)Reduce SLR in line with global standards-IMF:Excessive government control of public sector banks poses a risk of capital misallocationthat may constrain economic growth, a financial system stability assessment updatein the financial sector contributes to a build-up of fiscal contingent liabilities and creates arisk of capital misadebt manager may have led it to require banks to hold larger holdings of government debtthan might be needed on prudential grounds. The IMF has recommended that theStatutory Liquidity Ratio, the money that banks keep aside as liquid assets or invest ingovernment securities, be reduced in line with international standards. (BL dt. 18.01.2013p.6)State Bank of India plans by-invitation-only branches in 20 cities: -invitation- -rich clientsand non-resident Indians. These branches will remain open 24X7 and have facilities likelounges, conference rooms, personal business centres and cafeterias. The branches willoffer all the banking products and services of SBI and its subsidiaries. In 2010, SBI hadopened the first by-invitation-only branch - Kohinoor Banjara in Hyderabad. Its subsidiary,State Bank of Bikaner and Jaipur has recently opened a similar branch - Kohinoor Royale inJaipur. (BS dt. 18.01.2013 p.4)Gold Investment is not a hedge against inflation, says Chakrabarty: Terminginvestment in gold as speculative activity and not hedge against inflation, Reserve Bank ofIndia Deputy Governor Mr K C Chakrabaty said high returns the precious metal offers onlyreflects high risks associated with it. Discounting the argument that gold is a hedgeagainst inflation, the Deputy Governor wondered how a hedge instrument can offer asyears, how can it be a hedge against inflation? The second logic is that gold is a safe 17 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Education Society. (BL dt 19.01.2013 p.6)Swiss govt to accept group requests for banking info from Feb:Switzerland will be able to provide banking and other details sought by other countries,identification,senior official in the Swiss Finance Ministry said. The development follows intensifiedglobal pressure on Swiss authorities in the past couple of years to act against the secrecywalls of Swiss banks, which have been often accused of providing a safe haven to illicitwealth from abroad and not sharing the account details citing their client confidentialityprovisions. (BL dt. 22.01.2013 p.6)Speed up settlement claims of nominees:The RBI has directed urban co-operative banks not to insist upon succession certificatesfrom the nominees while settling claims in cases of deceased depositors to make theprocedure fast. (ET dt. 22.01.2013 p.7) -12, show RBI data:concern for the Reserve Bank of India, had worsened in 2011-12 and bankers say thesituation has not improved in the current financial year. Data from the RBI show the gapbetween deposits garnered and loans disbursed was the highest in the 1-3 year and 3-5year segments in 2011-12. In that year, banks garnered around Rs 16 lakh crore ofdeposits in 1-3 year tenures and they disbursed loans of around Rs 18 lakh crore. In the 3-5year tenures, deposits garnered were just around Rs 5 lakh crore and loans disbursed wereabout Rs 6 lakh crore. The worsening of ALM position of banks was stark in 2011-12 as inthe previous financial year, banks had garnered more deposits than they had disbursedloans in the 1-3 year segment. (FE dt.24.01.2013 p.10)Banking licences-Corporate honchos rule out conflict of interest:Chief Executives of leading corporate houses, led by Bajaj Auto Chairman Mr Rahul Bajaj,have come out in favour of granting banking licences to conglomerates, saying the RBIshould instead ensure Chinese walls between group companies and bank applicants, sothat banks avoid lending funds to group companies. However, Mr Deepak Parekh,Chairman of HDFC, the promoter of HDFC Bank, has asked corporates to stay out of thebanking business, citing past experiences. Many economists have cautioned againstgiving a banking licence to a conglomerate, saying it would lead to a conflict of interestbetween the bank and group companies. (BS dt. 24.01.2013 p.3)Panel suggests steps to strengthen coop credit:An internal committee of the RBI has highlighted the weaknesses in cooperative banksand recommended a slew of measures to strengthen the cooperative credit system in thecountry in a bid to push through financial inclusion. The committee observed that out of 18 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013370 central cooperative banks, 209 would require additional capital totaling Rs 6,500 croreover the next four years to reach 9% mandated capital ratio. (FE dt. 25.01.2013 p.10)Wait for banking licence norms set to get longer:The final guidelines for new banking licences could take a while, contrary to expectationsthat the RBI would announce those by month-end. Banking aspirants have been keenlyawaiting the norms since the draft guidelines were issued about a year and a half back.The process has hit a roadblock, mainly on two counts. First, the Finance Ministry hassuggested that real estate and brokerage companies be considered eligible for setting upentities in the banking space. According to RBI sources, this has delayed the process as thecentral bank now has to reinforce its earlier logic on why these companies should not beallowed. Second, some recent comments of entities like the International Monetary Fundthat industrial houses should not be allowed in banking have made RBI rethink the issue.(BS dt. 25.01.2013 p.1)Cautious RBI signals just a 25 bps rate cut:Although core inflation pressures have eased dramatically, and the Reserve Bank of India -emerge qui -widening currentaccount deficit might prompt the central bank to limit a cut in policy rates to 25 basisapproach is highlighted when it sayof commitment to the revise (FE dt.29.01.2013 p.1)RBI wants to issue new licenses as soon as possible:"Issuing of new banking licenses is in the final stage. We had consulted the government.They have made certain points to which we have rthat. Both the government and RBI will want to launch this as soon as possible." said Dr DSubbarao, Governor, RBI. (Mint dt. 30.01.2013 p. 5)RBI does its bit, cuts repo & CRR:Lending rates are set to fall after the RBI trimmed both the repo rate and the CRR by 25basis points each to 7.75% and 4%, respectively. The central bank last cut the policy rate by50 basis points in April 2012 and has injected Rs 1 lakh crore into the system since mid-September through a combination of open market operations and CRR cuts. Bankersthe latest cut in the CRR. (FE dt. 30.01.2013 p.1)Borrowers to be end beneficiaries:Bankers have said they will soon cut lending rates but not deposit rates-offering cheer toboth borrowers after the RBI announced a cut in key policy rates. SBI Chairman Mr PratipChaudhuri said the benefits of lower rates will be passed on to the borrowers, adding thatthe deposits rates may not be lowered immediately. He pointed out that SBI has 19 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013lender to lower deposit rates. Mr K R Kamath, C&MD of Punjab National Bank and C&MDof Indian Bank Association said cutting lending rates without reducing deposit rates will rsNet Interest Margins. (ET dt 30.01.2013 p.15)Ultra small bank branches in AP:As part of the financial inclusion plan, the Andhra Pradesh Grameena Vikas Bank (APGVB),a regional rural bank sponsored by the State Bank of India, has opened 105 ultra smallbranches (USBs) across the state as per the guidelines issued by RBI. These USBs are being facility targetingsmall villages having population of 2,000 and above. (FE dt. 03.01.2013 p.8)Yes bank eyes acquisition:Looking to expand its business and grow its financial metrics going forward, the new-generation private sector banking firm Yes Bank Ltd has said it is open to possibleacquisitions in banking, broking and asset management businesses, even as its organicgrowth plans are sufficient to meet its near-banking, broking and asset management businesses, its founder and CEO Mr Rana Kapoorsaid. (BL dt. 31.01.2013 p.6) 20 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Agriculture & Other Priority…..Govt may hike annual agricultural lending target for Banks:The government may increase the annual target of the banks for lending to theagriculture sector by 22%, in the upcoming union budget, to 7 lakh crore, in view of theachieve their direct lending targets and focus on the new improved Kisan Credit Cardscheme," said a Finance Ministry official. The banks will be able to meet the new targetseasily, the official said, since the revised classification includes companies of individualfarmers and partnership firms directly engaged in agriculture and allied activities. (ET dt.23.01.2013 p.10)Bank lending limit to small units for plant, machinery raised:The RBI has upped the existing investment limits in plant and machinery/equipment forlending by banks to micro enterprises. The revision, which is within the overall ceiling ofRs 25 lakh for micro enterprises as defined in the Micro, Small and Medium EnterprisesAct, is in view of the increase in price index and cost inputs. As per the revised sub-targetsfor lending to the micro and small enterprises sector, 40 per cent of total advances to thesector should go to micro (manufacturing) enterprises having investment in plant andmachinery up to Rs 10 lakh (existing limit: Rs 5 lakh). (BL dt. 01.01.2013 p.6)Banks wary of using a risk-based system to give education loans: -based pricingregime for education loans could prove a non-starter, say bankers. The proposed system isbased on assigning ratings to universities, institutes and colleges as well as students. Inthe six interactive meetings that banks and Finance Ministry officials had with educationconcept was mixed. While some reputed institutions welcomed such a rating model,many others (most South-based institutions opposed the idea) did not want collegeratings to be taken up by banks or other external agencies. The fear among many privatelyrun professional colleges is that an adverse rating may lead to students shunning them.(BL dt. 11.01.2013 p.5)CAG asks banks to recover money from ineligible beneficiaries:The Comptroller and Auditor General (CAG) has asked banks to recover money fromineligible beneficiaries under the Agricultural Debt Waiver and Debt Relief Scheme(ADWDRS) of 2008. The performance of audit of the ADWDRS by CAG has revealed thatbody wants banks to fix responsibility of bank officials as well as auditors for the lapses.Further, banks should consider lodging first information reports in cases of tampering ofrecords. (BL dt. 15.01.2013 p.5)Lenders want to recast SME loans without NPA tag:When some of the lenders urged RBI to permit them to restructure SME loans withoutsaid that banks are free to restructure the loans as many times as they want, providedthey classif 21 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013improve lending to SMEs. On whether there could be some special dispensation given tocredibility to (ET dt.23.01.2013 p.13) 22 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 BASEL…..Punjab & Sind Bank to raise Rs.1,000 cr:Punjab & Sind Bank on Tuesday said it will raise about Rs.1,000 crore by issue ofpreference shares. The board has approved raising of capital through preferential issue ofequity shares up to Rs.1,000 crore at a rate to be decided later, Punjab & Sind Bank said.(FE dt. 02.01.2013 p.8)12 banks may get Rs 12,000-cr capital infusion next week:The Government may soon consider a proposal for capital infusion of Rs 12,000 crore invarious state-owned banks, a top Finance Ministry official has said. The formal approval ofthe Cabinet has been sought and this may be taken up next week, D. K. Mittal, Secretary,Department of Financial Services (DFS), said. Also, the DFS is seeking nod for not comingback to the Cabinet up to 2018 for all the capital infusions to be made PSBs for Basel IIIrules purposes. Besides SBI, the banks that may get the capital support include BoM, UBI,and IOB. (BL dt. 04.01.2013 p.1)Basel-III: RBI mulls liquidity buffer from SLR portfolio:Following the Basel committee of banking supervision easing implementation of liquiditycoverage ratio, the Reserve Bank of India ( RBI) on Monday said Indian banks might beasked to carve out usable liquidity from their existing statutory liquidity portfolio. Underliquidity coverage ratio, banks are expected to hold a minimum level of highly liquidassets that can be sold in the open market to tide over a liquidity crisis. In normalconditions, these assets must at least be equal to the total net cash flows of the bank on aregular basis. (BS dt. 08.01.2013 p.5)Govt may infuse Rs 3000 Cr into SBI:The Government has indicated a capital infusion of Rs 3,000 crore ($544.32 million) intoa preferential allotment of shares, Mr Pratip Chaudhuri said. Capital infusion plans for thenext fiscal have not been finalized yet he added. (Mint dt 08.01.2013 p.11)Govt set to infuse Rs. 12,517 cr in PSBs:The Union cabinet approved infusion of Rs 12,517 crore in around 10 state- owned banksover the next three months. The Cabinet has also given in-principle nod for providing needbased re-capitalisation of banks till 2018-19 for ensuring compliance with the Basel IIIcapital adequacy norms. "Pursuant to the Budget announcement made on March 16,2012, we are infusing additional capital into the public sector banks. We will infuse beforethe end of this fiscal year a sum of Rs 12,517 crore," FM Mr P Chidambaram said. (ET dt.11.01.2013 p.9)Govt may use stake sale proceeds to fund banks:The Government is set to change the usage of earnings from disinvestment from the nextnew usage pattern of disinvestment proceeds from fiscal 2013-official told. Disinvestment proceeds are deposited in the National Investment Fund, 23 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013the Government proposes to use the disinvestment proceeds for subscribing to shares inrights issues by Central Public Sector Undertakings, including banks and insurancecompanies. (BL dt. 17.01.2013 p.1)Finmin requests RBI for relaxing capital adequacy norms:The Finance Ministry has requested the RBI to relax capital adequacy norms for banks inline with the recommendations made earlier this month by the Basel Committee onBanking Supervision. "RBI is fully seized of the matter and we have also requested it tolook into the issue. We are in conversation with them," said an official source. RBI deferredthe implementation of Basel III, the global capital norms for banks, by three months toApril 1. The deadline for the full implementation of the stiff liquidity norms or LiquidityCoverage Ratio (LCR) for banks, which were to kick in from 2015, has been extended till2019. Earlier this month, oversight panel Group of Governors and Heads of Supervision,which includes representation from India, of the Basel Committee on Banking Supervisiondecided to ease the LCR regulations. (ET dt. 17.01.2013 p.9)SBI board nod to Rs 3,004-cr capital infusion:The SBI board has approved a capital infusion of Rs 3,004 crore by the governmentthrough preferential allotment of shares. The infusion would help the bank shore up itstier-I capital. As of September-including tier-I capbanks capital base under Basel-III norms, effective April 1. On January 10, the governmenthad cleared first tranche of the Rs 12,517-crore capital an infusion into public sectorbanks. The Cabinet had approved infusion of Rs 3,004 crore for SBI. (BS dt. 20.01.2013 p.6)Syndicate bank to raise Rs 3500 Crore more:Mid sized state run Syndicate Bank, which raised Rs 1,000 crore of Tier II bonds and $500million (about Rs 2,680 crore) of overseas bonds in October 2012, obtained boardapprovals to raise Rs 1,500 crore of tier-I capital and Rs 2,000 crore of tier-II subordinateddebt C&MD Mr Sanghvi said. Syndicate Bank expects its credit portfolio to grow by about18% this fiscal and by at least 20% in the next fiscal, driving the need to furtherstrengthen CAR, which currently is at 10.29% as per Basel-I and 11.38% as per Basel-II. Thebank expects the CAR to improve by about 80 bps with every Rs 1000 crore of additionalcapital, said Mr sanghvi. (ET dt 24.01.2013 p.10)RBI asks banks to issue Tier-II bonds to retail investors:The Reserve Bank asked banks to issue bonds to retail investors, as to deepen the Indiathrough enhanced retail participation, banks, while issuing subordinated debt for raisingTier-II capital, are encouraged to consider the option of raising such funds through public (BS dt. 25.01.2013 p.5) 24 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Bonds… Money Market….Exim Bank raises $750 million:The Export-Import Bank of India has raised $750 million by issuing 10 year Reg S bonds tofunds it operations including extending lines of credit to the Governments of othercountries, export finance and support Indian companies overseas investments, said Mr (BL dt.09.01.2013 p.6)Plan to cut banks govt bond holding:To increase liquidity, the Reserve Bank may reduce the quantum of government securitiesto be held by banks under the held to maturity (HTM) category, Deputy Governor Mr H RKhan said. "We will consider reducing the G-secs under the HTM category to increaseliquidity in non-disruptive manner," Khan told. (Mint dt. 10.01.2013 p11)Call, bond rates down:The inter-8.15 percent. It had opened at 8.10 percent. The 8.15 percent government security, whichmatures in 2022, ended lower at Rs 101.87 (Yield: 7.86 percent) from the previous close ofRs 102.04 (Yield: 7.84 percent) (BL dt 19.01.2013 p.6) Credit Growth…..Festive demand sees spurt in retail loans, but worst far from over:Retail loans kept the momentum of credit growth going for banks in November, thanks toa late pick-up in the festive demand, according to the monthly data put out by the ReserveBank of India on Monday. Total retail loans for the month grew 16.3% from a year ago toRs 8,58,000 crore against a growth of 13.3% in November last year. In October, retail loanshad increased 14.1% to Rs 8,33,734 crore compared with the increase of 14.3% last year.Overall, bank credit during November grew almost 18% annually, to Rs 46,61,000 crorecompared with a 17.16% growth in the same period last year. (FE dt. 01.01.2013 p.8)Small private banks in wait mode:Small and mid-size private banks are not in a hurry to pare their lending rates, even asHDFC Bank, the second largest private sector lender, said it was reducing its minimumDeposit rates continue to remain high and unless there isDhanlaxmi Bank, told. (BS dt. 02.01.2013 p.5)Credit growth surge in last fortnight of Dec:Banks credit growth showed a sharp rise at the end of December, with loans worth Rs65,000 crore disbursed in last fortnight, compared with Rs 3,500 crore during the firstfortnight of the same month. According to bankers, the quarter-end pressure to meet 25 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013targets has resulted in the surge of credit off take. Similarly, deposit growth, which fell inthe previous fortnight, rebounded to Rs 43,000, the latest data release from the RBIshowed. (BS dt. 11.01.2013 p.5) -Dec, show RBI data:Hit by slowdown, balower compared with the same period last year, according to the latest data by ReserveBank of India. For April-December 2012, incremental credit at Rs 3, 89,110 crore was lowerthan Rs 4,04,530 crore in the corresponding period of 2011. Credit growth for April-December slackened to 9 per cent compared with 10.8 per cent last year. In October,Reserve Bank of India, recognizing the weak demand for credit, lowered its FY13 growthprojection for non-food credit to 16 per cent from 17 per cent. (FE 19.01.2013 p.12)Car loans may get cheaper:Consumers can soon get cheaper car loans from banks. Bankers expect these rates to dipby at least 25 basis points (BPS). Kotak Mahindra Bank has already cut car loan rates by 25-50 basis points to 11.5-people are spending. More people are opting for small Cars. Hence, there are no majorconcerns in the loan growth. Big players like SBI, HDFC Bank, Kotak and IndusInd areSecurities Ltd. (BL dt. 20.01.2013 p.1)Banks ease debt collection norms to support cash-strapped firms:Banks are relaxing collection norms on working capital loans to companies, whoseworking capital cycles have lengthened, straining their cash flows. In cases of genuinecash-flow constraints, banks are giving companies more-time to collect their accountsreceivable than earlier stipulated in their loan agreements. A senior State Bank of Indiaofficial said that in the case of working capital loans, previously, if the company did notcollect a certain portion of its receivables within 90 days, these were removed for thepurpose of calculatineed of the company, we have increased their period to 120-150 days and in some cases, (FE dt29.01.2013 p.10) 26 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 CARD…..Credit card spending on the rise, signalling consumer confidence:A sharp jump in the credit card spending in the past one year indicates consumers have sthird-largest economy. Credit card outstanding of Indian borrowers grew 26% to Rs.24,700crore in the 12 months to November, marking a significant rise over the previous year, theRBI data show. Credit card spending expanded 3.7% in the year ended November 2011.Before that, for two years credit card portfolios of banks had shrunk. (Mint dt. 03.01.2013p.7)Corp Bank launches RuPay Aadhar card:Corporation Bank has launched Corp RuPay Aadhaar card. A bank release said that thisproduct is primarily aimed at providing easy and hassle-free banking services to thefinancially excluded and underprivileged sections of the society having Aadhaar number.The card can be used at the conventional ATMs, micro ATMs or at the handheld machinesused by business correspondents and at point-of-sale terminals at merchantestablishments. The fascia of the card contains the Aadhaar number and this card can bea photo card or a non-photo card, it said. Corporation Bank is a partner in the directcash/benefit transfer scheme launched by the Government. (BL dt. 06.01.2013 p.3)Citi bank goes paperless:Citibank India on Monday announced a new paperless mobile payment system for itscredit and debit card customers that would do away with the charge slips and would beimplemented for the entire global network of its US-based parent Citigroup. (FE dt.22.01.2013 p.10)IndusInd Bank eyeing Rs 1,000-cr credit card biz:IndusInd Bank aims to touch Rs 1,000 crore in its credit card business by March 2014,according to Mr Romesh Sobti, MD and CEO, IndusInd Bank. That would be two per cent oftheir loan book then. At present the credit card portfolio is about Rs 380 crore. Mr Sobtifees, for - (BL dt. 22.01.2013 p.6) 27 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Deposits…...Oriental Bank waives penalty on premature withdrawal of FDs:Oriental Bank of Commerce (OBC) has waived penalty on premature withdrawal of fixedOBC.withdraw these prematurely (say from the second day up to the 10th year, depending onmaturity profile) without having to fork out any penalty. (BL dt. 02.01.2013 p.8)Axis joins state lenders in raising deposit rates:Axis Bank joined state-run lenders such as Dena Bank and Corporation Bank in raisinginterest rates for deposits in select tenor, sending contrary signal to the market, which isexpecting lower interest rates. Axis Bank, the countrys third-largest private sector bank,on Tuesday raised rates from 9% to 9.25% for deposits of size Rs 1 crore to less than Rs 5crore and for maturity of 18 months to less than five years. "We have raised rates for ALM(asset liability management) reasons," said a senior treasury official. (ET dt. 09.01.2013p.10)Bankers want RBI to allow interest on current accounts:Banks will ask the Reserve Bank of India to allow them to pay interest on current accountdeposits, in the run up to thflow into the system which otherwise stays with the establishments. Current accounts arenow 9.85 per cent of total deposits with banks. RBI will announce its third quarter reviewof the monetary policy on January 29. (BS dt. 14.01.2013 p.10)Banks want PAN rule relaxed for non-deduction of tax at source:Banks want the revenue authorities to do their depositors, who are economically weak,aged and infirm, a good turn. They have moved the authorities to allow them to act uponself-declarations made in Form 15G and Form 15H (for non-deduction of tax at source) bythe above mentioned category of people even if they do not have a permanent accountupon the Finance Ministry that such a move will alleviate the hardship caused to theeconomically weaker sections, the aged and the infirm. (BL dt. 14.01.2013 p.5) -year low:The growth in bank deposits continues to be sluggish and is at a nine-year low, accordingto the latest data from RBI. In the fortnight ended December 28, 2012, deposits grew just11% year-on-year, RBI data showed. The last time deposit growth dipped below 13% wasin December 2003. The RBI has projected a deposit growth of 15% for banks for FY13.Outstanding deposits of banks stood at Rs 64,77,246 crore as on December 28, 2012, agrowth of just 6% for the first nine months of FY13. Credit growth in the first nine monthsof the financial year was 7.1% compared with 10.5% last year. (FE dt. 16.01.2013 p.8) 28 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The drive to bring down high-cost and bulk deposits resulted in 1.88% decline in totaldeposits as on December 31, 2012 on a sequential basis for public sector lender IOB.Besides, the bank has also reported a growth of just 2.82% in gross advances for thequarter ended December 31, 2012. Cdeposits from 34% (as a percentage of total deposits) as on September 30, 2012 to 22% as DH dt. 21.01.2013p.15)Banks must popularize long-term deposits, says RBI working group:A working group of the RBI has suggested that banks must popularize long-term depositschemes having tenure of over 5-year and raise funds through long-term bonds. Thegroup recommended that large institutional investors such as provident funds andinsurance companies must be encouraged to invest in long-term bonds issued by banks.Further, banks must also invest in long-term government bonds having a tenure of 30-years as well. Banks can also explore the option of take-out financing and securitization togarner long-term funds. (FE dt. 23.01.2013 p.10)Deposit growth outpaces that of credit so far this quarter:Bank deposit growth, which lagged credit growth in the October-December quarter of thecurrent financial year, appears to be gathering momentum in the fourth quarter. As perthe January-March quarter, bank deposits grew by a robust Rs 62,750 crore while creditgrowth was relatively moderate at Rs 17,380 crore. In the October-December quarter, the2,23,238 crore, deposit growth was relatively muted at Rs 68,470 crore. (BL dt.24.01.2013p.6)ICICI, Axis Bank raise deposit rate ahead of RBI policy:have raised deposit rates by 25-30 bps on longer tenure maturities, raising doubts onwhether banks will cut lending rates even if the central bank eases its monetary policy inreview. While ICICI Bank has revised the deposit rate by 25 bps in the two to five yearsrate hike came into effect from 26 January, while for Axis Bank, the rate hike was effectiveJanuary 24. (BS dt.29.01.2013 p.5) 29 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Liquidity…..Banks pin hopes on RBI to overcome liquidity crunch:Banks facing liquidity deficit are hoping that the Reserve Bank of India will conduct openmarket operations (OMO) to help them tide over the crunch. While CRR is a morepermanent measure which carries with it the risk of boosting inflation, OMO is considereda more targeted measure, as it injects liquidity when really needed, according to bankers.growth has been slowing due to investmentsEswar said. (BL dt. 12.01.2013 p.5) Minsitry of FinanceBanks should review non-core- operations:The Finance Ministry has asked PSBs to review their exposure to non-core operations suchas insurance venturesbanks to look at their non-should look at non-core areas of investment when big global banks are exiting from theirnon-core are (Mint dt 07.01.2013 p.11)New licence norms likely in 4-6 weeks:The RBI is likely to issue final guidelines for grant of banking licences to new playerswithin the next 4-6 weeks. According to people with knowledge of the matter in theFinance Ministry, the RBI may release its final guidelines for new bank licences by Januaryend or early next month. The Finance Ministry is currently in the process of sending itsfinal comments to the RBI on the draft guidelines issued by the RBI on the matter, afterwhich the final guidelines would be announced. (Mint 07.01.2013 p.11)FM on banking benefits:Finance Minsiter Mr P Chidambaram said the government was making all-out efforts toensure benefits of banking facilities are made available to common people. Whilespeaking on the occasion of inauguration of Central Madhya Pradesh Rural Bankheadquarters in Chhindwara he said the processes for disbursing loans in education,home and agriculture sectors had been simplified so anyone could avail these creditfacilities. (BS dt 10.01.2013 p.5)Finmin notifies merger of 3 Orissa rural banks:The Union Finance Minister has notified the merger of three Orissa-based Regional RuralBanks (RRBs) - Kalinga Gramya Bank, Nilachal Gramya Bank and Baitarini Gramya Bank tocreate a new RRB, Gramya Bank. The new bank will be based in Bhubaneswar. After themerger, the bank will have 8,000 employees and is expected to do a business of Rs. 10,000crore per annum. The new bank will be sponsored by Indian Overseas Bank. Prior to themerger, Kalinga Gramya Bank was sponsored by UCO Bank, Nilachal Gramya Bank was 30 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013sponsored by Indian Overseas Bank and Baitarini Gramya Bank was sponsored by Bank ofIndia. (FE dt. 12.01.2013 p.8)Financial holding co to infuse equity into PSBs likely:The Finance Ministry will soon send a note to the Cabinet for setting up a FinancialHolding Company (FHC), which will leverage its capital base to infuse funds into publicsector banks, a senior ministry official said. The proposal, based on the recommendationsof the Shyamala Gopinath committee, has the backing of the RBI. The Ministry will alsosend its views on bank licence norms to RBI next week. Officials said corporate withexposure to real estate would not be allowed to apply for bank licences. In the first round,the government may prefer existing NBFCs including micro-finance NBFCs such as SKSMicrofinance as candidates, the official said. The FHC is being set up mainly to leverage itsbalance sheet in scontribution from the exchequer. (FE dt. 13.01.2013 p.1)FinMin sends views on banking permits to Reserve Bank:With the Finance Ministry sending its comments to the RBI, the final norms on freshbanking licences may soon be announced. According to sources, the Ministry wants a keyestate and stock broking firms from applying, said those in know of the development.Sources added the clause was not needed as RBI has already talked of ring-fencing banks.The Ministry has also asked the central bank to define the terms promoter and promotergroups more clearly. The comments also included permitting non-operative financialholding companies (NOFHC) to apply for bank licences rather than non-operative holdingcompanies and the capital adequacy norms for and NOFHC. (BS dt. 16.01.2013 p.6)Finmin in favour of realty, banking firms setting up banks:The Finance Ministry has expressed the view that the Reserve Bank should allow realestate companies and broking firms to set up banks as adequate safeguards will be thereto prevent exposure of promoters to related entities. In its comments to RBI on the givingout new bank licences, the Ministry has said that such entities can be allowed, but thereshould be a complete ban on taking exposure in the group companies or entities relatedto promoters, sources said. Even the vendor and large customers of such promoters cantget loan from the new bank, sources said, adding that this move will minimiseaccumulation of risk. (FE dt. 21.01.2013 p.13)8% growth will return Finance Minister: ts ofconfidence it would again achieve 8 per cent yearly growth. (BS dt 21.01.2013 p.6) al guidelines on new bank licences in two weeks: FMThe Reserve Bank of India (RBI) will announce new bank licensing guidelines within afortnight under which four-five licences are likely to be given to private sector entities,Finance Minister Mr P. Chiof India will announce the final guidelines for licensing more private sector banks. We 31 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013number of large corporate houses, including Anil Ambani-led Reliance Group, financialconglomerates Religare and Shriram groups, engineering-to-technology major L&T groupand Aditya Birla group, are said to be interested in entering the banking business,depending on the regulatory framework. (Mint dt. 31.01.2013 p.26) 32 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Forex Inflows…..NRI deposits cross $11 bn in Apr-Nov:Dollar inflows from non-resident Indians into bank deposits surged in the April-Novemberperiod this year to $11.24 billion from $6.39 billion a year ago as higher interest rates anda weak rupee lured NRIs to invest here. In these eight months, non-resident (external)rupee accounts saw an inflow of $12.79 billion, six times that of last year, data from theReserve Bank of India showed. Non-resident (ordinary) rupee accounts and foreigncurrency non-resident accounts saw an outflow this year as against an inflow last year.Inflows had surged in April and May after rupee depreciated sharply. The currency hit anall-time low of 57.32/$ in June. (FE dt. 12.01.2013 p.8)Forex reserves fall by $1.58 billion:Foreign exchange reserves fell $1.58 billion to $295 billion on the back of a fall in foreignweek ended January 4, foreign currency assets fell $951.7 million to $261 billion. The gold 2 billion, while special drawing rightsfrom the IMF decreased $34.7 million to $4.4 billion. (BS dt. 12.1.2013 p.3)Forex reserves up by$1.26 billion:Foreign exchange reserves rose $1.26 billion to $295.25 billion for the week ended January11, on the back of sharp rise in currency assets, the Reserve Bank of India said. Foreigncurrency assets were up $1.24 billion to $262.276 billion. Gold reserves remainedunchanged at $27.22 billion. Special drawing rights were up $31.3 million to $4.433billion, wh$16.5 million to $2.324 billion. (BS dt 19.01.2013 p.8) Housing Worries…..OBC cuts interest rate on home loans by 0.1%:State-owned Oriental Bank of Commerce (OBC) reduced interest rate on home loans of upto Rs 30 lakh by 0.1 per cent. As a new year gift to customers, home loans will now beavailable 10.40 per cent with an EMI of as low as Rs 937 per lakh, OBC said in a statement.The base rate or the minimum lending rate of the bank is also 10.40 per cent. Besides, thebank has also slashed margin for home loans above Rs 20 lakh to 20 per cent, it added. Forloans below Rs 20 lakh, margin will be 15 per cent. (FE dt. 02.01.2013 p.8)Housing finance sector may see increase in bad loans:The housing finance industry could be saddled with an increasing number of bad loans asgreater competition forces lenders into stepping up volume to maintain profit, accordingto NHB Chairman Mr R. V. Verma. The waiver of pre-payment penalty charges hasincreased rivalry among banks and housing finance companies, which the regulator fearswill lead to a dilution in underwriting and appraisal standards. The RBI had ordered thewaiver of penalties on early payments of floating-rate loans in October 2011 to ease theburden on borrowers. (Mint dt. 03.01.2013 p.7) 33 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013SBI home loan portfolio rises Rs 4,800 cr in Q3:Lower interest rates, better schemes and a general festive demand has helped State Bankof India increase its home loan portfolio by around Rs 4,800 crore in the three monthsended December 31. This is higher than the Rs 4,700 crore growth added during theJanuary-March quarter in 2009-10 when the teaser loan scheme was helping the bank tand at around Rs 1,13,000 crore ason December 31, a senior official of the bank said. (FE dt. 10.01.2013 p.8)SARE Homes, ICICI Bank ink pact:SARE Homes has inked a memorandum of understanding with ICICI Bank to offer specialfinance schemes for thetwo projects, SARE Homes has offered customers an option to pay 20 percent of thebooking amount for an apartment, an offer available for a limited period. (BS dt11.01.2013 p.4)Now, SBI home loans at below 10% as base rate trimmed by 5 basis pts:State Bank of India (SBI) on Wednesday cut its base rate by 5 basis points (bps) to 9.70%,effective February 4, in a move that will make loans cheaper for all its customers. OnTuesday the Reserve Bank of India had cut the policy rate and the cash reserve ratio (CRR)by 25 basis points each. This is the first time since March 2011 that interest rates on SBIshome loans rates will fall below 10%. SBIs base rate is now in line with HDFC Banks baserate, which is the second-lowest in the industry after Royal Bank of Scotland which has abase rate of 9%. SBI had last cut its base rate by 25 bps to 9.75% in September last year. (FEdt. 31.01.2013 p.1)NHB reduces prime lending rate by 25 bps:National Housing Bank has reduced its prime lending rate from 10 per cent to 9.75 percent with immediate effect. The housing finance regulator has also decided to reduceinterest rate by 25 basis points on special refinance scheme for urban low incomehousing. The move to reduce interest rate on special refinance scheme follows the RBIdecision to cut repo rate by 25 basis points, Mr R.V. Verma, Chairman and ManagingDirector, told. The refinance rate has now been reduced by 25 basis points to 8.25 per centfrom 8.50 per cent in respect of loan upto Rs 5 lakh and 8.50 per cent from 8.75 per centper annum for loans upto Rs 10 lakh. (BL dt. 31.01.2013 p.6) Human Resources…..SBI creates new GM position for restructuring:The countrys largest lender, SBI, has created a new General Manager (GM) position in itsmid-corporate group dedicated to deal with loan restructuring. Mr Shyamal Acharya,Deputy Managing Director, of the mid-corporate groupat SBI, said the GM will focus solely on the the timely identification of accounts to berestructured and bring in a more hands on approach to monitoring and following up ofrestructured accounts. (FE dt. 01.01.2013 p.8) 34 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Strike by Reserve Bank of India staff deferred:proposed nationwide strike. The forum said the decision to defer the strike was takenafter the Reserve Bank of India management gave an assurance the currency and coinscounters of RBI would not be closed from Tuesday. (BS dt.01.01.2013 p.4)One lakh clear bank-clerk test:About one lakh candidates have cleared the online test for recruitment of clerks in PSBsagainst an estimated vacancy of about 30,000 for the year 2013-14. More than 10 lakhcandidates took the online test. The tests were held in 11 sessions from December 15 to30 in more than 800 centres in 212 cities across the country, said the Institute of BankingPersonnel Selection. These students will now be called for interview. (BL dt. 12.1.2013 p.5)Govt to go ahead with lateral promotions for CMD posts:The government is going ahead with lateral promotion for the C&MD posts. At least, itwould appear so with the appointment of Ms V R Iyer at Bank of India and Mr R K Dubeyat Canara Bank, who were EDs at Central Bank of India. Insiders say, soon Mr S S Mundra,ED of Union Bank of India, will take charge as C&MD of Bank of Baroda. The governmenthas dropped the earlier plan of shifting experienced C&MD of small banks to biggerbanks. (ET dt. 16.01.2013 p.19)Manipal, Federal Bank in pact:Manipal Global Education Services and Federal Bank has announced the launch of FederalManipal School of Banking at the Manipal University Bangalore Campus in city. TheFederal Manipal School of Banking offers a one year full time programme on various areasof banking and management, a statement said (BS dt. 19.01.2013 p.9)Banking body to pursue 5-day issue:All India State Banthe issue of implementation of five-day week in the banking industry. State Bank of India - (BS dt. 22.01.2013 p. 5)PSB chiefs may get fixed 3-yr term from this April:The Finance Ministry has approved a proposal to give PSB C&MDs a fixed tenure of threeyears to help them implement long-term strategies smoothly. Sources said FinanceMinister Mr P Chidambaram has cleared the proposal and sent it to the appointmentscommittee of the Cabinet for final clearance. It is likely to be implemented from April 1,they said. At present, most C&MDs serve for one to two years as their appointmentstypically come closer to their superannuation date. (FE dt. 23.01.2013 p.1)Banks doing the moolah rouge at IIMs this year:Banks are stepping up hiring at IIMs this placement season and have rolled out at leastthree Rs 1 Crore salary offers so far. Deutsche Bank has given two such PPOs at IIM-Ahemdabad for its London office and Morgan Stanley has offered a Rs 1 Crore package to 35 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013a student at IIM-Calcutta, sources involved closely in the placement process say. Mostglobal and Indian banks are hiring more than last year and many are offering paypackages that are 10% to 15% higher. HSBC which recruited 17 students from the top IIMslast year, is now hiring 30%-40% more. It is increasing pay packets from around Rs 15.5lakh last year to about Rs 16.5 lakh in its resident management trainee programme and Rs18 lakh for students with prior work experience. (ET dt. 24.01.2013 p.1)SBI to hire 1,500 officers:In a notification for recruiting 1,500 probationary officers issued on Wednesday, SBIprescribed graduation in any discipline as the minimum qualification without mentioningany percentage of mper cent to be eligible to apply for probationary officers. This notification does notbank exams, said. (BL dt.24.01.2013 p.6) Inflation…..Inflation still high, no room for monetary stimulus-RBI:Ahead of its third quarterly policy, the RBI has said that inflation was still high and therewas no room for fiscal or monetary stimulus to boogrowth is slowing down you can stimulate the economy either by monetary easing or byfiscal stimulus, but both monetary and fiscal side have no room for stimulus. So that is the aid. Notwithstanding expectations of interestrate cut by the RBI in its quarterly monetary policy on January 29 on back of declining (BL dt. 17.01.2013p.6) Infrastructure…..Perdaman seeks A $3.5 bn in damages from ICICI Bank in coal supply case:against the Ms Chanda Kochhar - led ICICI Bank seeking A$3.5 billion in its ongoing legalbattle with Lanco Infratech over a stalled fertilizer project. The company said it had filedits application in the federal court in Perth on January 2. The dispute centres around acoal- -to-urea project in Western Australia. LancoInfratech clarified that ICICI Bank has no contractual relationship with Perdaman. ICICI 36 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Insurance…..CCI approves stake PNBs stake in MetLife India:Fair trade regulator CCI has approved 30 per cent stake purchase by state-owned PNB inMetLife India Insurance Company. The Competition Commission of India (CCI) said thedeal would not have any adverse impact on the competition scenario. In its order onDecember 26, CCI noted that operations of PNB and MetLife India are not similar oridentical. (ET dt. 04.01.2013 p.10)Bancassurance degrows in FY 12:While bancassurance has emerged as one of the fastest growing channel of distributionfor the life insurance companies over the past couple of years, it has shown degrowth forthe insurers during 2011-12. But in the medium term, the analysts felt, bancassurancemay re-emerge as one of the fastest growing channels. For HDFC Standard life totalpremium from bancassurance has gone down by 12%. For ICICI Prudential, the decline has(FE dt.23.01.2013 p.10) Mutual Funds & Capital Market…..IOB board gives nod to rights issue:The board of directors of Indian Overseas Bank (IOB) has given its approval for a rightsissue. The move comes close on the heels of postponing the plans to raise Rs 800 crorethrough Tier-I perpetual bonds, reportedly due to unfavourable market conditions. Now,with the board clearing the rights issue, the Chennai-based public sector lender will issue20 crore equity shares of face value of Rs 10 each at a premium to be decided on the basisof market conditions. (FE dt. 01.01.2013 p.8)Banks set to book high treasury gains for Q3:Banks are set to record higher treasury gains for the quarter ended December, comparedto profits booked in the quarter ended September. These gains would be under theavailable-for-sale (AFS) portfolio of gilts. Under AFS portfolios, gilts are purchased with theintent of selling these before maturity. According to treasury heads of banks, the declinein gilt yields in this period would lead to gains. Compared to private banks, public sector ) giltVice- President (research), Angel Broking. (BS dt. 03.01.2013 p.5)Government rules out public offers by PSBs this fiscal year:The government has ruled out the possibility of any PSB coming up with a public offer inthe current fiscal. This means these banks will not be able to cash in on the recent rally inthe stock markets. The government plans to infuse capital in banks through thepreferential placement route, a finance ministry official told, adding that the aim is toinfuse about Rs 15,888 crore by March-end and maintain 58% stake in state-run banks. 37 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The top three banks that require immediate capital infusion are IOB, Central Bank of Indiaand BoM. (ET dt. 07.01.2013 p.11)BofA Merrill positive on government banks:The investment bank says upgrades come on back of a steepening bond yield curve in theanticipation of the RBI rate cuts, stronger than expected loan recoveries and reducedquality pressures. BofA Merrill also upgrades its price objectives for private banks,retaining ICICI Bank Ltd as its top pick and HDFC Bank Ltd and Axis Bank Ltd as its s. (BS dt. 09.01.2013 p.4)Debt fund, equity taxation may be aligned:The government is considering bringing the tax treatment for debt mutual funds in linecompared to equity mutual funds. Equity mutual funds do not have dividend distributiontax, etc. In debt mutual funds, there are taxes. This is being considered by theportion of stat (BSdt. 10.01.2013 p5)Retail investors continue to liquidate equity in top 200 cos:who continue to take a cautious approach despite a host of reform measures initiated bythe Government and SEBI. Retail investors continued to liquidate their holdings in thebanking and financial services (BFSI) space. Barring HDFC Bank, ING Vysya Bank, M&MFinancial Services and IFCI, all other companies within the BFSI space reported a drop inretail shareholding. Syndicate Bank witnessed the biggest drop (0.45 percentage points)followed by Federal Bank (0.35 percentage points). Companies like ICICI Bank, SBI, CanaraBank, Axis Bank, Union Bank of India, HDFC, IDFC and Bajaj Holdings saw their retailshareholding decline in the range of 0.3 to 0.35 percentage points. (FE dt. 15.01.2013 p.11)Banks sell Kingfisher shares at lower prices:The uncertainty surrounding the revival of grounded Kingfisher Airlines Ltd appears tohave persuaded a few banks to reduce their stake in the carrier by selling the sharesacquired through a loan conversion, at lower prices. The move is aimed to limit losses asbanks are struggling to recover money from the beleaguered airline. ICICI Bank Ltd, thelargest private sector lender in the country, sold 9.6 million shares of Kingfisher. (BS dt.16.01.2013 p.4)SEBI for allowing ETFs to park 20% gold holdings with banks:The SEBI has proposed allowing gold exchange-traded funds to park up to 20% of theirgold holdings with commercial banks. As of now, gold ETFs need to maintain 100% oftheir gold reserves. Under the proposed mechanism, banks are expected to loan the goldreceived from ETFs to jewellers and pass on a part of their returns from such loans to ETFsas interest income, which in turn will share the profits with their unitholders. (ET dt.16.01.2013 p.11) 38 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013PNB to raise Rs 1250 cr by issuing preference share to govt:State-owned Punjab National Bank approved a fund infusion of Rs 1,250 crore throughpreferential issue of shares to the government. PNB has approved issuance of shares offace value of Rs 10 each for raising up to Rs 1,250 crore on preferential basis in favour ofGovernment of India, PNB said in a filing to the BSE. The proposed preferential allotmentwill be subject to necessary approvals and the price for issue would be decided by as permarket regulator SEBI rules, it said. The bank will hold an extraordinary general meeting ofshareholders on March 4 to take up approval for the same. (ET dt. 18.01.2013 p.7)IDBI Bank plans to raise Rs 555 crore via preferential issue to Govt.:IDBI Bank is planning to raise Rs 555 crore through preferential issue of equity capital tothe government. The bank is also planning to raise upto Rs 2,500 crore via the qualifiedinstitutional placement route. (BL dt. 22.01.2013 p.6)UCO Bank to get Rs 681 crore from govt by March:UCO Bank announced it will get Rs 681 crore as part of the governments capital infusionplan for the current fiscal. The board approved the proposal for issue of equity shares onpreferential basis in favour of Government of India for an amount aggregating to the tuneof Rs 681 crore, UCO Bank said in a filing on the BSE. The issue price may be determined inaccordance with SEBI (ICDR) Regulations 2009, it said. The proposal is subject to necessaryregulatory approvals, it said. The government has approved infusion of Rs 12,517 crore inaround 10 state-owned banks by March. Last fiscal, the government pumped in about Rs12,000 crore additional in public sector banks as against Rs 20,117 crore in 2010-11. (BSdt.24.01.2013 p.5)Axis Bank to raise up to $1 bn via share sale:Indian private sector lender Axis Bank Ltd is selling shares to raise as much as $1 billion,two sources with direct knowledge of the matter said on Monday, in the biggest equitydeal for the year. The bank is selling up to 34 million shares to institutional investors atRs.1,390 a share to raise as much as $877 million, said the sources, who declined to benamed as they were not authorized to speak to the media. Separately, Axis is also raisingup to $152 million by allotting up to 5.9 million shares on a preferential basis at Rs.1,390rupees a share, said the sources, adding the bank would raise a total of about $1 billionfrom the two tranches. (Mint dt.29.01.2013 p.9)SBM to raise Rs 70-80 cr via institutional placement:State Bank of Mysore is to go for Institutional Placement Programme (IPP) by March 31, toSBI) is 7.67 per cent. We plan to go for IPP to offload the balance (2.33 per cent) to raisebetween Rs 70comply with the SEBI norm of increasing minimum public shareholding.(BL dt. 30.01.2013 p.10) 39 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 NPA….Kingfisher and Suzlon to weigh on IOBs Q3 show: -ridden KingfisherAirlines will turn a non-performing asset for the third quarter ended December 2012. -stressed Tulsi Tanti-promoted wind energy firm is above Rs 10,000 crore. Aother way but to treat it (Kingfisher) as NPA for September-December 2012. It will entailChennai-based public sector lender. Its exposure in excess of Rs 800 crore in Suzlon EnergyLtd will also require provisioning. According to IOB officials, since Suzlon has already beenadmitted for CDR, it will not be treated as NPA. However, the bank will have to makeprovision for a restructured asset in the third quarter of FY13. (BS dt. 02.01.2013 p.4)Banks weighed down as debt recast doubles in Apr-Dec:Loans worth a staggering Rs 62,500 crore have been recast by the corporate debtrestructuring (CDR) cell between April and December, a 100% jump over the previous yearwhich witnessed a figure of Rs 31,601 crore. In the nine months to December, the cellreceived a recast request once in three days, a sign of the severe stress on corporate cashflows. The Reserve Bank of India, which estimates that around 15-20% of such assetstypically turn toxic, is in the process of tightening norms for debt restructuring. In themeanwhile, banks have taken matters in their own hands, deciding that promoters needto make larger contributions to the package and cough up 25% of the diminution in thefair value of the restructured account. (FE dt. 03.01.2013 p.1)Nodal banks appointed for 10 states:The department of financial services (DFS) has appointed nodal banks for preparingfinancial restructuring plans (FRPs) pertaining to the restructuring of SEBs of 10 states. Asenior government official associated with the process said the co-ordinating banks hadbeen appointed for seven states that were part of the restructuring plan alreadyannounced by the centre and also three other states which had shown willingness to jointhe scheme. Among the seven states, Canara Bank and OBC will be the nodal banks forHaryana and PNB will assist UP. Central Bank of India, PNB and BoB will assist Rajasthan inpreparing FRP. Canara Bank will also be the nodal bank for Punjab and Karnataka. (BS dt.04.01.2013 p.4)Bankers to decide future course of action on Kingfisher soon:Kingfisher lenders will soon decide on future course of action with regard to the groundedairline Chaudhurisaid. (BS dt. 08.01.2013 p.4)Asset quality woes to remain elevated in Q3:earnings numbers. PSU banks will report weak asset quality on the back of their exposure 40 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013to troubled sectors, while for private banks the asset quality is likely to remain stable.larger share in assets under recast in the CDR cell. The State Bank of India should continueto stand out with likely sharp rise in gross NPAs .At about Rs 4,000 Crore and Rs 6,000crore of slippages, said a Morgan Stanley report. (FE dt 08.01.2013 p.8)Kotak Mahindra Bank takes symbolic possession on DC Press:In a fresh setback to cash-starved media house Deccan Chronicle Holding (DCHL), KotakMahindra Bank, one of its lenders, has taken symbolic possession of its printing presslocated in Kondapur in Hyderabad. On Tuesday, the Mumbai-headquartered private sectorbank served a possession notice on DCHL under the SARFAESI Act. A symbolic possessionmeans the lender will not have they to the property, which will still remain under thecontrol of the borrower. While Canara Bank, the lead banker of the lenders consortiumcheck for any discrepancies, companies like Karvy Stock Broking and state-run lender IFCI (ET dt. 09.01.2013 p.5)SBI plans bad-loan sale:SBI plans to sell part of its Rs 49,200 crore of soured debt to boost asset quality and profitamid the slower economic growth in a decade. The government controlled bank isworking on the sale or recovery of 37% of Rs 18,000 crore, of its bad loans, Ms Soundaraare looking at selling non-performing (BL dt 10.01.2013 p.5)Bank offloads Deccan loans to Pegasus ARC:IndusInd Bank has sold its exposure (loan worth Rs 100 crore) in financially ailing DeccanChronicle Holdings Ltd (DCHL) to Pegasus Asset Reconstruction Company. Mr Romeshthan the regulatory norm, for the Deccan Chronicle account. The recovery is expected tobe in the region of Rs 60 crore. The ARC will issue securities receipts to IndusInd Bank, hesaid. Another private bank, Axis Bank, classified its loans to DCHL as a non-performingasset in the second quarter. It has already made adequate provisions against theexposure. In the second quarter, lenders to DCHL had considered taking the account to theCorporate Debt Restructuring Cell. The idea was taken off the table after ICICI Bank, thelead lender, withdrew the proposal. Deloitte is conducting a forensic audit on DCHL. (BSdt. 10.01.2013 p.5)No new loans for Kingfisher, says SBI Chairman:SBI Chairman Mr Pratip Chaudhuri has said that there is no question of committing freshloans for the ailing Kingfisher Airlines. Asked to comment on the latest revival planproposed by the airline, Mr Chaudhuri said the window available for any revival may haveAny credible revival plan for Kingfisher would call for sinking of at least $500-700 million,which translates into Rs 2,500 crore to Rs 3,000 crore. (BL dt. 11.01.2013 p.5) 41 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Under the Securitisation Act, it is the Chief Manager of a public sector bank and hiscounterparts in private sector banks who are authorised to take a decision on the need forseizing the mortgage asset and issue notice accordingly. The Andhra Pradesh High Court,in Sampoorna Battu v. ICICI Bank, found that the advocate of the respondent bank hadissued the impugned notice to the petitioner on her default in servicing a home-loan shehad taken from the bank.The Court, taking a strict view of the drill prescribed in therelevant law, pointed out that the subsequent countersigning of the notice on theborrower by the appropriate official of the bank did not exorcise the notice of itsdeficiency, and it stood vitiated despite the subsequent amends.The Court, however,made it clear that it was for the bank to decide whether it would like to issue a freshnotice in accordance with the law. (BL dt 11.01.2013 p.5)Oriental Bank may rejig loans worth Rs 2,500 cr:OBC is likely to restructure loans worth Rs 2,500 crore in the next few quarters. The bankhas a restructuring book of close to Rs 10,500 crore. According to C&MD Mr S.L. Bansal,the bank is in the process of restructuring its Rs 450-crore advances to Moser Baer. Theprovisioning of up to 0.75% on restructured accounts, this will put pressure on bottom (BL dt. 12.01.2013 p.16)Banks want debt repayment in KFAs Rs 650-cr revival plan:Mr Vijay Mallyas Rs 650-crore investment proposal to revive operations of groundedKingfisher Airlines has piqued its lenders as the plan does not include repayment of theprivate carriers existing bank debts. According to bankers, in the Rs 650 Crore revival plan,there is no mention of how the debts would be repaid. There also are doubts if theinvestmencrore. A Senior Executive with a large public sector bank says, if the carrier decides to repayloans only to select lenders, option of selling real estate of the airline and its chief wouldbe explored. (BS dt. 14.01.2013 p.1)Banks look to sell NPAs of Rs 4,500 cr before March 31:Lenders are looking at selling around Rs 4,500 crore worth of bad assets to assetreconstruction companies before March 31, sources close to the development said. IDBIBank has put up around Rs 880-crore worth of bad loans, while PNB and Allahabad Bankhave announced sale of about Rs 600 crore of NPAs each. Similarly, Central Bank of Indiahas put up Rs 525 crore worth of bad assets on sale and UCO Bank has decided to sell Rs382 crore worth of bad loans. Private sector lender Federal Bank, too, is looking at sellingRs 230 crore worth of bad loans to asset recon- struction companies. (FE dt. 16.01.2013p.8)ICICI Bank moves court against Deccan Chronicle promoters:ICICI Bank, the biggest lender to the cash-strapped media house Deccan ChronicleHoldings (DCHL), has moved a local court in Hyderabad against the promoters after acheque issued for Rs 350 crore by them bounced. ICICI Bank had in all lent Rs 511 crore toDCHL, which is still to repay Rs 350 crore of loans. This is the second case such against thepromoters of Hyderabad-based media house involving cheque bounce after the film 42 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013financing firm PVP Capital dragged them to court in December. Admitting the case filedby ICICI Bank under Negotiable Instruments Act, a criminal court in Secunderabad hasserved notices on the DCHL promoters and directors asking them to appear before thecourt on April 10. (ET dt. 18.01.2013 p.3)Banking shows signs of instability on rising NPAs:The banking system has recently shown signs of moderate rise in instability due toincrease in non-performing assets (NPAs), the Reserve Bank has said in a working paper."The movements in the banking stability indicator that there are symptoms of a moderaterise in instability of the banking sector in recent periods perhaps due to the rise in theNPA," it said in a working paper on Banking Stability - A Precursor to Financial Stability. (ETdt. 21.01.2013 p.9)Banks step up pressure on Kingfisher Airlines:Banks stepped up pressure on beleaguered Kingfisher Airlines (KFA), stating it needed tobring in a minimum capital of Rs 2,000 crore. Only then can there be some possibility of (BS dt. 21.01.2013 p.3) s.2.12 trillion:denting the ability of Indian companies to repay their loans, leading to an unprecedentedsurge in restructured assets. Total loans restructured by Indian banks under the so-calledCDR route crossed Rs.2 trillion in December. In the Oct-Dec quarter, banks restructuredRs.24,584 crore of loans, up from Rs.19,544 crore they recast in the previous quarter, toreach Rs. 2.12 trillion. Among the large banks that have the maximum amount of NPAsUCO Bank (4.88%) and Punjab National Bank (4.66%). (Mint dt. 22.01.2013 p.3) :Ratpublic sector banks. While the government is likely to remain supportive, relatively highinflation and modest fiscal capacity mean that policy options are constrained comparedbeen barely detectable in most countries in the region. Amongst 17 countries thatreceived a negative outlook. (FE dt. 22.01.2013 p.10)Bad loans of Indian banks are likely to begin easing in the second half of 2013, backed byan expected recovery in the economy, according to India Ratings and Research Pvt. Ltd,formerly known as Fitch India. Cyclical pressures (repayment difficulties faced by sectors 43 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013like cement, shipping, automobiles during economic downturn), the primary reason forstress in most sectors, will begin easing by then, leading to improvement in the assetquality of banks, Mr Ananda Bhoumik, a senior director at India Ratings and Research,said. (Mint dt. 23.01.2013 p.9)Allahabad Bank may sell Rs 540-cr bad loans in Q4:In a bid to improve performance in asset quality and margins, Allahabad Bank will sell Rs540 crore worth of NPAs to asset reconstruction companies. The process is currently onand will be completed during the current quarter, said Ms Shubhalakshmi Panse, C&MDof Allahabad Bank. According to Ms Panse, the bank has adopted a three-pronged strategyto rein in NPAs. This includes appointing a General Manager to look after the creditmanagement, doubling the recovery target from Rs 411 crore to Rs 911 crore andoffloading a part of the Rs 2,300-crore NPAs. (BS dt. 23.01.2013 p.5)Worries over asset quality choking credit flow, says RBI Governor:The Reserve Bank said banks should ensure adequate loans to productive sectors asuncertainty due to non-performing loans is hurting the flow of money to needy sectors."Risk aversion in the banking system stemming from concerns relating to growing non-performing assets is constraining credit flow," said Mr D Subbarao, Governor, ReserveBank of India. "Notwithstanding the importance of repairing asset quality, banks shouldbe discerning in their loan decisions and ensure adequate credit flow to productive sectorsof the economy, he added. (ET dt. 30.01.2013 p.15)Banks bear the brunt of bad debts, additional provisioning:Banks that declared their results on Wednesday for the quarter ended 31st Decemberreported lower net profit growth on the back of extra provisioning on restructured loansand non-performing assets. The Reserve Bank of India (RBI) had asked banks to set aside0.75% more as provisions towards loans restructured in the December quarter. Chennai-state-run banks have been witnessing volatility in profitability and asset-qualitydeterioration. (Mint dt. 31.01.2013 p.17) Other Banking News…..Bank of Maharashtra net jumps on lower provisioning:Bank of Maharashtra reported a 43% jump in net profit in the December quarter at Rs 194crore on the back of lower provisioning and robust loan growth. The Pune-based publicsector lender had posted a net profit of Rs 136 crore in the year-ago period. Net interestincome increased by 23% to Rs 792 crore compared with Rs 645 crore in the year-agoperiod. (BL dt. 23.01.2013 p.6)Axis Bank net up 22%:Private lender Axis Bank Ltd reported a 22% year-on-year rise in net profit for the quarterended 31 December on higher interest income and lower provisions for bad loans. Net 44 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013profit for the October to December period, at Rs.1,347 crore, beat Bloomberg Newsestimate of Rs 1,263 crore. Earnings per share improved to Rs 31.42 from Rs 26.53 lastfrom Rs.422 crore in the same quarter in 2011, and net non-performing assets dropped to0.33% of net outstanding loans from 0.39% in the year-ago quarter. A Rs. 33 croredepreciation writeback into provisions from last year added to the profit. (Mint dt.16.01.2013 p.9)BoB profits to feel pressure on higher credit costs:BoB, which enjoys a healthy NIM, could see pressure building up on its profitability, due tohigher credit costs and lack of mitigating fee-based income, according to rating agencyIndia Ratings. According to India Ratings, the pressure on liquidity due to longer tenureloans, like infrastructure loans, could also lead to higher refinancing costs. This might dentratio rose sharply to 1.98% at the end of September 2012 from 1.53% in 2011-12. The risewas due to general macroeconomic deterioration across sectors. (BS dt. 14.01.2013 p.10)Bank of India Q3 profit up 12% at Rs 803 cr:State-owned Bank of India reported a 12.2% increase in net profit at Rs 803.48 crore forthird quarter ended December 31, 2012. The bank had posted a net profit of Rs 716.15crore for the same quarter of last fiscal. Total income of the bank increased to Rs 8,959.83crore during the October-December quarter from Rs 8,002.27 crore in the year-ago period,Bank of India said in a BSE filing. For the first nine months of FY2012-13 ended December,2012, the bank has clocked 15.54% rise in net profit, to Rs 1,992.76 crore, from Rs 1,724.79crore in the same period of the previous fiscal. (BS dt.29.01.2013 p.5)Federal Bank Q3 net up 4% on 48% NII jump:Federal Bank net profit in the third quarter of the current financial year rose 4.4% y-o-y toRs 210.8 crore. The modest rise in profit was helped by a 48% y-o-y surge in non-interest -interest income for the quarterfell 6% y-o-y to Rs 497.35 crore. The total income for the quarter stood at Rs 1,725.62crore, up 7% y-o-y -December quarterfell 47 basis points over the previous quarter to 3.47%. (FE dt. 18.01.2013 p.10)HDFC Bank net rises on consumer loans:the fiscal third quarter rose 30% as it lent more to consumers and companies, and earnedhigher interest and non-interest income. Net profit rose to Rs.1,859 crore, or Rs.7.80 pershare, in the quarter ended 31 December from Rs.1,430 crore, or Rs.6.10 per share, a year oll. Netinterest income, or the interest earned on loans minus that paid for deposits, rose 22% toRs.3,799 crore on a 24% increase in loans. Non-interest income rose to Rs.1,799 crore fromRs.1,420 crore, driven by a 24% increase in fees and commissions to Rs.1,402 crore. (Mintdt. 19.01.2013 p.1)HDFC net up 16% at Rs 1,140 crore: 45 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The HDFC reported net profit of Rs 1,140 crore for the quarter ended December 31, up16% from a year ago. However, net profit fell by Rs 11 crore from the previous quarter, onaccount of lower dividend income, said Mr Keki Mistry, Vice-Chairman and CEO, HDFC.Dividend income during the third quarter was at Rs 45 crore against Rs 194 crore in thepreceding quarter. The mortgage lender saw its interest income rise 19% to Rs 1,624.25crore during the three-month period. Sequentially, NII fell 0.6%. (FE dt. 22.01.2013 p. 10)IDBI Q3 net up mere 1.7% at Rs 417 cr:IDBI Bank posted mere 1.7 rise net profit at Rs 417 crore in the third quarter endedDecember 2012 on rise in provision for stressed assets including Kingfisher airlines. Its netprofit for Q3 of 2011-12 was Rs 410 crore. The total income in the quarter rose to Rs 7,070crore from Rs 6,281 crore in October-December 2011. The net interest income showedrobust growth (33.3%) at Rs 1,413 crore. The net interest margin (NIM) also improved to2.3% in Q3 of FY 13 from 1.89% in Q3 of FY 12. The fee-based income registered 68%growth at Rs 605 crore in Q3, Mr R K Bansal, Executive Director said. (BS dt. 19.01.2013 p.8)IndusInd net up 30% on loan demand, fee income:loans. Net profit rose to Rs.267 crore from Rs.206 crore in the year earlier, beating theestimate of analysts. A Bloomberg survRs.263 crore. Its loans grew 31%, almost double the growth of the banking industry.remittance products, foreign exchange, mutual funds and insurance. (Mint dt. 10.01.2013p15)Karnataka Bank to focus on CASA deposits, retail loans:Retail loans and current/savings deposits will be the focus areas for Karnataka Bankduring the current fiscal. By the end of 2012-13, the bank wants its CASA deposits to be27% of the total deposits. According to Mr P. Jayarama Bhat, MD & CEO of the bank, theshare of CASA in total deposits was 23.4% in the third quarter of 2012-13. CASA depositsof the bank stood at Rs 8,114 crore during the third quarter of 2012-13 as against Rs 7,138said. (BL dt.29.01.2013 p.6)Kotak Mahindra Bank net up 25% to Rs.577 crore:ended December rose 25% to Rs. 577 crore, riding on higher interest and fee income. Theprofit was higher than Bloomberg(Mint dt. 23.01.2013 p.7)LVB gets RBI nod for 71 new branches:Lakshmi Vilas Bank has received permission from the Reserve Bank of India to open 71more branches. The new permission allows the bank to open branches in Metro, urban,semi-urban and rural centres. Currently, LVB is serving a customer base of over 2 millionthrough a network of 291 branches as on December 31, 2012. (FE dt.24.01.2013 p.10) 46 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013OBC net profit drops 8% to Rs 326 cr on increase in provisioning:State-owned Oriental Bank of Commerce (OBC) posted 7.8 per cent decline in net profit toRs 326.40 crore for the October-December quarter due to increase in provisioning. Thebank had posted a net profit of Rs 354.22 crore for the October-December quarter of theand Managing Director Mr S L Bansal said. (BS dt. 26.01.2013 p.3)Syndicate Bank biz crosses Rs 3 lakh cr:Syndicate Bank has achieved a milestone by achieving over Rs 3 lakh crore businessturnover as on December 31. At a simple ceremony, M G Sanghvi, C&MD of the bankthanked all the customers for their support in achieving the goal. Later, Mr M AnjaneyaPrasad and Mr Ravi Chatterjee EDs of the bank addressed the staff members of the bank.(BL dt. 05.01.2013 p15)SBI clocks 17% credit growth in Q3: per cent y-o-y growth in credit tillDecember 2012, with substantial business coming from the retail segment. While theretail category - home and automobile - loans have shown good growth, corporate creditis also showing sign of revival, Chairman Mr Pratip Chaudhuri said. The bank has shown17.8 per cent y-o-y growth in credit till September 2012. The total loan book was Rs9,56,000 crore at the end of September. The retail segment showed 13.6 per cent growth,with loan dues of Rs 1,91,760 crore at the end of September 2012. (BS dt. 21.01.2013 p.10)SBT plans automated loan processing:In a bid to get rid off the bad loans, State Bank of Travancore (SBT), is planning to switchover to a fully automated loan processing system by 2014. Taking a cue from RBIs book onchoosing good borrowers based on data analysis and individual credit scoring, the bankwill kick start the trail run on this by June this year. Mr P Nanda Kumaran, SBT MD saidfully automated loan processing will eliminate the human interface that could makedifferent analysis on the loan applications received. (FE dt. 05.01.2013 p8)SBT net profit up by 31% in Q3:State Bank of Travancore has posted a net profit of Rs 132 crore in the third quarter of2012-13, registering a 31% jump over the corresponding quarter of the previous year. On ay-o-y bais, the profit of the bank has grown by 25% from Rs 357 crore in the first ninemonths of the previous year to Rs 449 crore in the corresponding period of the currentfiscal. The net interest income moved up from Rs 1325 crore to Rs 1511 crore, a y-o-ygrowth of 14.04%. NIM stood at 2.50% at the end of the third quarter. (ET dt.29.01.2013p.6)Union Bank of India revises rates for FCNR deposits:Union Bank of India revised the interest rates applicable to FCNR (B) deposits, effectiveJanuary 1, 2013. Dollar-denominated deposits maturing in one to two years will earn2.84% as against 2.86%. Two-three years deposit will earn more now at 2.41% as opposedto 2.39%. Deposits maturing in 3-4 years will be paid 3.49% against 3.46%. Those 47 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013depositing money for 4-5 years will earn 3.64% (against 3.59%) and if investing for over 5years, theyll earn 3.83% (against 3.77%). (BS dt. 03.01.2013 p.5) wth: Vijaya Bank hasposted a 2 per cent increase in net profit at Rs 126.73 crore for the quarter endedDecember 31, 2012, against Rs 124.27 crore in the same period last year. The marginalincrease was due to increased provisioning as mandated by the Reserve Bank of Indiacoupled with a slowdown in the economy. The advances and deposits increased to Rstouched an all-time high of Rs 1,54,320 crore. (FE dt. 25.01.2013 p.7)Yes bank net rises 35% at Rs 342 crore in third quarter:Yes Bank reported a 34.7% jump in net profit for the quarter to December 2012 on highermargins and 48% growth in non-interest income. The bank said net profit rose to Rs 342crore from Rs 254 crore in the year-ago quarter. Net interest margins, or the differencebetween cost of funds and yields on advances, improved to 3% from 2.9% in the secondquarter. (ET dt. 17.01.2013 p.3)Central Bank net up 59.3% to Rs 180 crore: -o-y to Rs 180 crore inthe third quarter of the financial year 2012-13. The growth in net profits was helped byweak profits in the same quarter of the previous financial year which was hit byexceptional expenditure. In the previous quarter of this financial year the bank posted anet profit of Rs 330 crore. The NIMs of the bank rose by 7 bps to 2.6%, thanks to easingcost of funds. (FE dt. 31.01.2013 p.7)IOB posts 7.6% rise in net at Rs 116.50 crore: Indian Overseas Bank (IOB) has reported a7.6% rise in its net profit at Rs 116.50 crore for the third quarter, against Rs 108.27 crore inthe same quarter last fiscal. The total income of the bank rose to Rs 5,846.98 crore from Rs5,015.33 crore. The interest income of the bank rose 16% to Rs 5,333.14, compared Rs4,604.26 crore. The net NPA stood at 2.33% as against 1.23% in the same quarter last year.(FE dt. 31.01.2013 p.7)Dena Bank net up 10% on NII boost:Dena Bank on Wednesday reported a net profit of Rs 206.44 crore for the quarter endedby 13.62% year-on-year to Rs 614.90 crore during the quarter. Other income for the bankstood at Rs 144.46 crore, up 8% from a year ago, while total income rose by 33% from theprevious year to Rs 2,408.42 crore, in the Oct-Dec quarter. (FE dt. 31.01.2013 p.10) 48 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Person in News…..New ED joins Corp Bank:Mr Bibhas Kumar Srivastav has assumed charge as the Executive Director of CorporationBank with effect from Jan 28 2013. Before taking up this assignment,, he held the positionof GM of Allahabad Bank at Kolkatta and was in charge of Priority Sector Credit andFinancial Inclusion Verticals. (BS dt 30.01.2013 p.5)New Director on SBH Board:The Government has nominated social activist Mr Syed Mazher Hussain as Director on theBoard of Directors of State Bank of Hyderabd. He would be on the Board for a period ofthree years with effect from January 16 according to a Press release. (BL dt. 30.01.2013p.6)Deepali Joshi elevated as ED, RBI:Ms Deepali Pant Joshi has been promoted as the Executive Director of the Reserve Bank ofIndia. Prior to her elevation, she was the Renine EDs. (BL dt. 01.01.2013 p.6)Gokarn demits office; govt yet to identify his successor:The extended term of Dr Subir Gokarn, a Deputy Governor of the RBI, ended on Monday.The post will remain vacant till the government identifies his successor. Dr Gokarn was incharge of monetary policy department and the department of economic analysis andpolicy-two critical departments of the central bank which has been fighting a persistentreview is slated for 29 January. (Mint dt. 01.01.2013 p.23)Economist Urjit Patel to be new RBI Deputy Governor:Economist and public finance expert Mr Urjit R Patel is set to be named as the Reservewho left office on December 31 after a three-year term and a one-month extension.post as recommended by a panel comprising Governor Dr D Subbarao and department offinancial services secretary Mr D K Mittal. A formal announcement is expected shortly. (FEdt. 02.01.2013 p.1)Ashwani Kumar takes over as chairman of Dena Bank:Public sector lender Dena Bank said on Tuesday that Mr Ashwani Kumar has taken over asChairman and Managing Director of the bank for 5 years. Prior to joining Dena bank, MrKumar was the Executive Director of Corporation Bank since December 2010. (Mint dt.02.01.2013 p.10)M D Mallya BS Banker of the Year:Mr M D Mallya, who retired from BoB as C&MD in November last year, is the BusinessStandard Banker of the Year 2011-12. He was chosen by a four-member jury, headed by 49 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013former SEBI Chairman Mr M Damodaran. The other jury members were Edelweiss GroupChairman & CEO Mr Rashesh Shah, AIG India Chief Executive Mr Sunil Mehta and Mr AnilSinghvi, IIAS founder Director and Ican Investment Advisors chairman. The jury hadinitially shortlisted four bankers from a list of 23 on parameters ranging from return onequity and business per employee to quality of assets and growth in deposits andadvances. (BS dt. 11.01.2013 p.1)Anjaneyulu named LVB interim MD:Lakshmi Vilas Bank has appointed Sri KSR Anjaneyulu as the additional director, ManagingDirector and Chief Executive officer with immediate effect. The Karur-based bank in a nted as an additional director and ManagingDirector and Chief Executive officer of the Bank for a temporary period till regular MD and ember 2012, the Bank had said Mr P R Somasundaram (FE dt. 11.1.2013 p. 8)RBI Dy Guv Anand Sinha may get 2-month extension:The government is likely to extend Reserve Bank of India Deputy Governor Mr Anandcase, as a deputy governor is appointed for a five-year term, or till he/she is 62, whichevermonth, the government had appointed Mr Urjit Patel as RBI Deputy Governor. Mr Patel,who would look after the monetary policy department, replaces Dr Subir Gokarn. (BS dt.18.01.2013 p.4)Mundra named as Bank of Baroda C&MD:Mr S S Mundra has been named by the government as the C&MD of Bank of Baroda. Heused to be ED of Mumbai-based Union Bank of India but has had a previous stint at Bankof Baroda, which he joined as an officer in 1977 and served until 2008 as General Managerone and half years until he retires in July 2014. Mr Mundra will succeed Mr M.D. Mallyawho retired in November. Separately, Union Bank of India named Mr K. Subrahmanyam asthe new Executive Director. Mr Subrahmanyam joins the bank from Indian Overseas Bank.(Mint dt. 22.01.2013 p.19) RBI Directives…. & Guidelines….RBI Governor to handle monetary policy for now:RBI has said that Governor Dr D Subbarao will take charge of monetary policy portfolio inthe absence of a Deputy Governor (DG) for the department. The portfolio of Dr SubirGokarn, whose term expired on December 31, have been redistributed among existingDGs and the RBI Governor. Department of statistics and information management andmonetary policy department will report directly to the governor. In addition to existingportfolios, Dr K C Chakrabarty will look after DICGC, Rajbhasha Department and Right to 50 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Information Division. Mr Anand Sinha will look after the department of communicationand risk monitoring department. Mr H R Khan will look after financial marketsdepartment. (ET dt. 02.01.2013 p.9)RBI eases KYC norms:The Reserve Bank of India eased the Know Your Customer (KYC) norms for moneychanging activities. "If the address on the document submitted for identity proof by theprospective customer is same as that declared by him/her, the document may be acceptedas a valid proof of both identity and address," RBI said. "This has been done to ease theburden on the prospective customers in complying with KYC requirements for doingmoney changing activities," it said. However, a separate proof of address will be requiredin case the address indicated on the document submitted for identity proof differs fromthe current address, Reserve Bank of India said. (BS dt. 03.01.2013 p.5)we have all seen this issue of central bank independence play out in Japan with politicalpressures on the Bank of Japan to adopt a higher inflation target so as to create moreroom for growth stimulus. The example of Japan is recent and high profile, but by no (BS dt 04.01.2013 p.4)Report frauds to audit panel- RBI:The Reserve Bank of India has directed banks to place information regarding any fraudsbefore the audit committee of the board of directors every quarter. In a notification onFriday, RBI said an annual review of frauds should also be conducted and placed beforeboard before the end of the next quarter, i.e., for the quarter ended 30 June, and suchreviews need not be sent to RBI. These may be preserved for verification by the Reserve (Mint dt. 05.01.2013 p10)Once a green horn, D Subbarao aims to demystify RBI in 2013:Calling himself a "green horn" at the time of joining Reserve Bank as its Governor over fouryears ago, Mr Dr Duvvuri Subbarao has now set a goal to demystify the black box imageof RBI and make it a role model for central banks globally. "For an outsider looking in, theRBI is like a black box. Everyone knows people in there do important things, but cannotfigure out the connection between that and their lives. It is important that we demystifythe RBI so that people know enough to demand accountability from us," Mr. Subbaraosaid in a new year message to his colleagues, while listing out his priorities for the centralbank at an institutional level in 2013 and beyond. (FE dt. 07.01.2013 p.14)Macro will determine decision on rates-RBI:Weeks ahead of its third quarter review of monetary policy, Reserve Bank of India said itwill look at current macroeconomic situation besides inflation before taking a call onreducing interest rates. "Definitely the policy rate is 8 per cent. Inflation should not comedown to 3 per cent to review the rate but that is depending on the macro economic 51 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013situation," Reserve Bank of India Deputy Governor said. He added that 7 per cent inflationis definitely not comfort zone. RBI has at many occasions said that it should be around 5per cent. The Reserve Bank of India is scheduled to announce its third quarter monetarypolicy review on January 29. (ET dt. 08.01.2013 p.10)Final guidelines on new bank licences soon-RBI:The RBI will soon release the final guidelines on issuing new bank licences, said deputygovernor Mr Anand Sinha. He, however, refrained from giving a timeframe. The RBIreleased the draft guidelines in August 2011 and said that the amendment to the bankingBill is essential for the guidelines to be framed. Mr Sinha said that the central bank wouldtake note of the concerns of the companies in framing the guidelines. Mr Sinha said thedraft guidelines are not onerous on NBFCs. Nevertheless, issues faced by the companieswill be looked into. The RBI released draft guidelines for NBFCs in December and hasinvited comments from stakeholders by January 10. (FE dt 08.01.2013 p.8)RBI eases norms for corporate bond repo market:The RBI has eased the norms for trading in corporate repo markets by making short-termdebt securities also eligible for it, and by widening the credit default swaps basket, movestraders describe as small step towards deepening the bond markets. The central bank saidshort-term corporate debt could be traded in the repo market, where holders of securitiespledge them to borrow funds with a promise to buy them back at a future date. "Repo inshort-term securities will take off, unlike corporate bonds. In short-term securities(CPs,CDs), the liquidity of the underlying is higher, so the price discovery will be better,"said Mr Shashikant Raathi, head, debt capital markets at Axis Bank. (E T dt 08.01.2013p.10)RBI panel calls for 30 year fixed rate loans:A RBI committee set up to assess the feasibility of introducing long term fixed rate loanproducts has proposed that banks should make efforts to offer fixed rate loans with up to30-year maturity to help reduce the monthly repayment burden on borrowers. The panelis chaired by Mr K K Vohra, Chief General Manger, Internal Debt ManagementDepartment, RBI. (Mint dt. 23.01.2013 p. 9) - RBI:The Reserve Bank of India has said that banks cannot give differential interest rate ondeposits below Rs 1 crore. RBI said that deposits of over Rs 1 crore will be termed as bulkdeposits and can be taken at differential interest rates by the bank. Banks will have thediscretion to disallow premature withdrawal of a term deposit in respect of bulk depositsof crore and above of all depositors. (FE dt. 25.01.2013 p.10)RBI plans inflation-indexed bonds: r us, the attraction to do inflation-indexed bonds is to wean investors away from gold.So, if you have to provide them an instrument which yields inflation-indexed return, this isthe most straightforward asset, but we will have to engage both the government and the -indexed bond is a good idea in thecurrent context as it provides protection against inflation by giving investors a coupon 52 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013interest payment plus the inflation rate which is adjusted every quaRege Nitsure, Chief Economist with the BoB. (ET dt 30.01.2013 p.11) ` Movement….Betting on exchange rates, NRIs lose money on India deposits:on a depreciating rupee to boost returns. The cumulative value of deposits maintained by -time high of $67,018 million in September2012. But forex fluctuations have not worked in the favour of all NRIs. The cumulativevalue of deposits maintained by NRIs in Indian banks rose by $8.1 billion during the firstsix months of FY13. (BL dt. 04.01.2013 p.11)Rupee jumps 69 paise:The rupee breached the 53-level to close 69 paise stronger, at a two-and-a-half monthhigh of 53.70 against the dollar. The rupee strengthened on higher capital inflows even asthe bellwether BSE Sensex closed above the 20,000 mark for the first time in two years.On Thursday, the Indian unit had closed at a two-week high of 54.39 per dollar. The rupeecontinued its strong showing on Friday, opening firm at 54.09 against the dollar, on theback of the Governments announcement on Thursday to deregulate diesel prices. (BL dt.19.01.2013 p.6)Rupee ends higher at Rs 53.77 on rate cut:The Rupee closed higher at Rs 53.77 against the Dollar after the central bank cut both theCRR and Repo rate by 25 Basis Points. The currency unit had opened marginally weaker at or theAmerican currency from importers and banks. The currency touched a high of Rs 53.54after the RBI announced its third quarter Monetary Policy review. However, month endDollar demand weighed on the Rupee. (BL dt 30.01.2013 p.6) Technology…..Direct cash transfer in 20 districts :Governments Direct Benefits Transfer (DBT) scheme will be rolled out in 20 districts onJanuary 1 as against the earlier plan of covering 51 districts. Finance Minister, Mr PChidambaram on Monday said that the government is proceeding with a great degree ofcaution and will watch every step. By March 1, the government will cover 43 districts inthe country under DBT. The government is also preparing the banking system tostrengthen the withdrawal arrangements. The Finance Minister said that the 7,900 bankbranches in these 43 districts will have an onsite ATM and banks have also floated tenderfor 20 lakh inter-operable micro ATMs. "These micro ATMs will have facility for biometricscanning and Aadhaar authentication," he said. (ET dt. 01.01.2013 p.9) 53 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013More time to apply for WLAs:The Reserve Bank of India has extended the deadline for submitting applications for theWhite Label ATMs to January 15. The decision was taken on representations made bysome applicantscapital to raise their net worth to Rs 100 crore. (BS dt.01.01.2013 p.4)SBI has launched mobile wallet service MobiCash Easy on a pilot basis in Mumbai andDelhi. The prepaid service allows customers to transfer money to any bank account or toany wallet issued by SBI, pay bills, recharge mobiles, and pay for digital TV and broadbandconnections. The customers can also check their balance and the last five transactionsthey conducted through their mobile wallet. Both SBI and non-SBI customers can makeuse of this service. (BL dt. 01.01.2013 p.6)Govt transfers Rs 35.45 lakh on launch day:The government rolled out Direct Cash (or benefit) Transfer scheme in 20 districts across16 states on Tuesday, transferring over Rs 35.45 lakh in 1980 transactions to the accountsof beneficiaries with Aadhar or Unique Identity numbers. "There were about eight bankswho were bankers to the governments schemes and 23 recipient banks who receivedpayments on beneficiary accounts," said a senior official from National PaymentCorporation of India, on condition of anonymity. However, a major problem, bankers say,has been the lack of sufficient number of hand-held devices for the bankingcorrespondents. (ET dt. 02.01.2013 p.11)Dr K C Chakrabarty, Deputy Governor of RBI, gave a dressing down to CEOs of commercialbanks at a recent meeting on customer service. For instance, he asked banks to justify thecharges they impose on customers to avail service from non-are advertising One nation. One branch. One account. - then where is the question ofcharging customers for up-dating their passbook at a non- (ET dt.09.01.2013 p. 13)Banks give iPads to DGM and above to connect with gennext:Most PSBs are becoming tech savvy. Many have started distributing iPads to seniorofficials in the hope that they would be better positioned to relate with young customers.SBI has given iPads to all officers who are of DGM rank and above, while BoI and IOB havegiven it to all their GMs and above. Atleast now PSU bankers have something to lookforward to. (ET dt. 09.01.2013 p.14)Risk-wary users refuse to rush into M-banking:Banks are pushing mobile business, but cautious customers seem to be in no hurry tomake the switch. Scared of being exposed to cyber criminals, most people have restrictedthe use of mobile applications to checking account balances. Customer reluctance hascompelled banks, which are eager to save time and cut costs, to offer freebies and carry 54 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013out marketing campaigns to popularise their mobile apps. "This is very similar to theonline banking trend of early 2000s, where customers initially did only low-risk, non-financial transactions like checking their balances or ordering cheque books," said MrSridhar Iyer, Director for digital business at the Indian arm of Citibank. (ET dt. 17.01.2013p.1)Cite reasons for denial of ATM ser vice to board-RBI tells banks:The Reserve Bank of India has asked banks to incorporate information pertaining to denialof services to the customers at ATM sites, reasons there of and the action taken to avoidrecurrence of such instances in the quarterly review of ATM transactions to their board ofdirectors. In this regard, the central bank has given an indicative list of 33 reasons thatbanks need to mention, including invalid transaction, invalid PIN, exceeded withdrawallimit, exceeded number of tries, lost or stolen card, and time-out. (BL dt. 18.01.2013 p.6)Tech upgrade to enable SBI double ATM network:SBI can now double its ATMs with the Chennai-based Financial Software and Systems(FSS) upgrading the back-end technology to run these machines. FSS, which is a paymentsystems integrator, is a solution provider and technology partner of SBI. Tech upgradationwill help SBI increase its ATM network from 30,000 to over 60,000 ATMs in the next two tothree years, said Mr Nagaraj Mylandla, MD, FSS. (BL dt. 31.01.2013 p.6) Random Payment System Issues of Systemic Relevance for the New Year Shri G. PadmanabhanIt is always a pleasure to be in Gods own country to welcome the New Year. I am thankfulto the Bankers Club of Thiruvanathapuram for affording this opportunity by inviting meover. I also deem it a privilege to be addressing the Bankers of the state which recentlycaptured the imagination of the nation when one of the districts - Ernakulam- wasdeclared as the first financially included district in the country. I am aware of theenormous efforts put in by the bankers in the State under the stewardship of our RegionalDirector Shri. Salim Gangadharan. Congratulations to the entire banking community ofthe State.2. The year that went by was quite challenging for the financial sector. The worseningof the sovereign debt crisis in Europe and the unsteady recovery in the USA had posedsignificant risks to emerging markets like India, with domestic factors playing a majorrole-perhaps in balance a more decisive role in shaping the course of Indian financialmarkets which remained volatile. As current account deficit burgeoned and reached arecord high, debate on the contributory role of gold imports intensified. Without gettinginto the thick of the debate, let me state two things. First, the argument that a centralbank which had diversified its own assets into gold has no moral right to preach againstinvestment / import of gold is missing an important point. A central bank diversifying itsdollar reserves into gold is entirely different from private agents in a country havingcapital controls investing in gold as it has the same effect of allowing such assets to be 55 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013held in foreign currency! It has to be clearly recognised that the Central bank undertakesthe onerous responsibility of managing the forex reserves of the country with theobjectives of safety, liquidity and return in that order and investment in gold is in pursuitof these objectives! In the case of private savers, by stashing away his savings in gold, theeconomy stands to lose the benefit of accumulated savings which can go a long way inadding to the GDP of the country. Second, given the insatiable lure for gold in the country,it is imperative that we introduce gold linked products which results in the existing gold inbank lockers getting converted as financial products rather than unabated import of gold,if we are to find a sustainable solution for our current account problems.3. Moving on, as we welcome what appears to be another year of turbulence for themarkets, and when the Indian banking system is readying to adopt Basel III norms even inthe face of growing NPAs, I thought it fit to discuss certain important issues relating topayment systems. You will appreciate that the payment systems all over the worldincluding in our country functioned efficiently even while the crisis was crippling themarkets. The issues that I propose to flag are of relevance to all stake holders using theIndian payment system.Decline of cheques - a myth or a must?4. The growth in electronic payments (in volume terms), in recent years is quiteheartening when one sees that the share of electronic payments as a percentage of totalpayments have grown from 15% in 2003-04 to 48% in 2011-12. Despite this, in absoluteterms cheque volume continues to be high (52% of total payments), even though thegrowth is showing a declining trend. While this high cheque volume could be attributedto overall growth in the economy and the consequent growth in financial transactions, itis nonetheless desirable that transactions in electronic form increases at an increasingrate rather than being contended with transactions through cheques increasing at adecreasing rate. It would also be desirable to migrate the existing cheque usage to anelectronic form in view of the benefit which would accrue to both the payer and payee ofthe cheque which in turn has a positive impact on the economy as a whole.5. In fact, the "Payment Systems in India-Vision 2012-15" talks about drawing up astrategy for disincentivising usage of cheques above a certain threshold limit bycustomers and corporates which may include prescribing a cut off limit for chequescleared through clearing house arrangements. As announced in the "Second QuarterReview of Monetary Policy" we are in the process of preparing a Discussion Paper on themethods aimed at disincentivising the issuance and usage of cheques in India and placingthis paper in the public domain for comments.6. Before coming to the challenges and strategies for moving paper basedtransactions to electronic mode, let me touch upon the need for doing so. As we all know,cheques when compared to electronic payments are less efficient for various reasons - ithas high printing and processing costs, requires manual interventions in the form ofencoding and keying in cheque details, poses significant reconciliation challenges in termsof payables and receivables, needs to be preserved for longer period as per legal andregulatory requirements, has longer clearing and processing cycle etc., in addition tohaving inherent liquidity and credit risks. In contrast, electronic payments eliminate theseinefficiencies and provide a faster, efficient, secured mode of transactions at a fraction ofthe cost. Electronic payments, where they are credit-push based imply that credit,liquidity and systemic risks are substantially reduced, and there is also adequate certaintyon funds availability to the beneficiary. Despite these perceived virtues, physical 56 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013instruments are still preferred by people as they can be seen and therefore moretrustworthy as compared to unseen electronic transactions happening in seconds! Herethe challenge for the bankers is to change this mindset through training and education ofcustomers.7. Several studies have been undertaken on the cost and benefits of cheques vis-aviselectronic payments. A study undertaken by the Reserve Bank of Australia in 2007-08pegged the average payment cost of cheques (for consumers, merchants and financialinstitutions) at AUD7.69, as compared to AUD1.21 for credit cards and AUD 0.67 forEFTPOS. The UK Payment Council in its report "The Future of Cheques in UK" (2009) hasindicated that the costs of electronic alternatives are at least one third lower than the costof cheques. The report also estimates that the closure of the cheque clearing could lead tocost savings for the UK (for financial institutions and corporates) up to £1 billion perannum by 2018.Studies by Humphrey, Willesson, Bergandahl & Lindblom (2003) foundthat migration away from paper-based payment methods was one of the key factor thatcontributed towards reduction in bank operating costs (a 24 per cent reduction,accounting for $32bn) across Europe from 1987-1999. Back home, studies by the IndianBanks Association have also revealed that the costs relating to paper based instrumentsare relatively higher than electronic modes although the former is less efficient as well. Tosummarise, the key conclusion from several studies is that there is a social business casefor moving away from paper based instruments. Thats why several jurisdictions such asUK, Canada, Ireland and Australia have drawn or are in the process of drawing theroadmaps for managing declining cheque usage in their jurisdictions.8. However, this is easier said than done. Consumer habits which have been ingrainedover the years do not change as quickly as changes in technology take place. So, even ifnewer electronic forms of payments are introduced, widespread adoption of such modestakes time. Many users - including the Government - may also be apprehensive of using anew mode of payment and as such may resist the movement from their comfort zone(of using cheques).Issuing of cheques does not cost money (most banks offer somenumber of cheques leaves free of cost), whereas some charges have to be paid forinitiating electronic payments. Given the lack of awareness, cost considerations mayoverride safety and speed considerations.9. Recognising the complexity of the challenge, any strategy to discourage the use ofcheques by individuals as well as institutional users has to have a multi-pronged approachencompassing cost and time considerations, incentives for use of electronic modes oftransactions and disincentives for the use of paper-based instruments. However, thedecline of cheque usage has to be carefully managed so that the unwarrantedramifications such as slippage to cash based transactions and inconvenience to vulnerablesegments of the customers having no access to alternative electronic modes of paymentsare avoided.Why expand CTS if cheques are to be discontinued?10. As you may be aware, grid CTS in Chennai now covers 43 clearing locationsencompassing the states of Tamilnadu, Kerala, Karnataka, Andhra Pradesh, West Bengaland the Union Territories of Puducherry and Chandigarh. Pan-India roll out of CTS isexpected to be completed by December 2013. Questions are being raised on the need forexpansion of grid CTS for improving the efficiency of paper based clearing given the focusof the Vision Document towards electronic payments. Let me try to address thesequestions. 57 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201311. First, the paper-based clearing continues to be the dominant mode of retailpayments in the country constituting 52% in terms of volume. It is also widely acceptedthat consumer behaviour does not change as quickly as changes in technology. This beingthe case, despite our objective of electronification of payments, requirements for safetyand efficiency enhancements in paper-based clearing cannot be ignored.12. Second, even though Speed clearing hastens the process of cheque collection ascompared to outstation cheque collection, it pre-supposes the presence of the draweebank (at least one branch) in the clearing house location which could be a limitation. Incomparison, grid-based CTS, is a superior system as it encompasses a larger geographicalarea and the chances of drawee bank not having presence in the grid location issignificantly reduced.13. Third, grid CTS would provide significant cost savings both to the system operatorsas well as the system participants. From a systemic perspective consolidation of clearinglocations into a few grids would minimise the cost of replacement of aging MICRmachines and the related AMC costs. Banks will benefit from economies of scale as thegrid CTS obviates the need for establishing inward cheque processing infrastructure atvarious clearing locations. Further, once local clearing houses are subsumed into the grid,the settlements which are now spread across clearing locations would be subsumed intoa single settlement, thereby significantly reducing the liquidity requirements (opportunitycost included) for the banks. The CTS will also result in other benefits in terms of reductionin the cheque processing fee, reduction in operational overhead, elimination of clearingdifferences and reconciliation issues etc.14. Fourth, as long as physical instruments cannot be realistically wished away even inthe medium term scenario, it is economically sensible to leverage on technology to reducethe recurring processing costs, though it might involve a onetime capital expenditure.15. There are a few challenges as well. The CTS implementation and the modeladopted in India do not have a parallel elsewhere in the world and the features aimed atsecurity and safety need to be addressed optimally. This is the reason behind the directiveto all banks to migrate to the use of a uniform standard for the CTS cheques. Further,there is an increase in the responsibilities of the collecting banker when compared to thenon-CTS scenario. A change in the mindset of the staff of banks is also a vital necessity,and this would transcend to the ultimate customer too. While it is heartening to note thepositive outcomes in all these areas, we must recognize that full scale achievement ofthese would take time.Entry of non-banks in payment system- A mirage or a threat?16. It is quite discernible in many payment services that non-banks have made inroadsinto an area that was once considered the exclusive domain of banks. Traditionally, banksalone played an important role in holding deposit funds (store of value) and providingpayment services (medium of exchange). With significant developments in technologygoing hand-in-hand with the growing demand for faster and more efficient paymentservices by users, banks no longer find it possible, viable or even necessary to offer thewhole range of payment services (end-to-end) by themselves, when the same could beoutsourced and offered more cost-effectively. These reasons coupled with the growthpotential have led to the entry of non-banks into the payment services area.17. Some of the reasons for the almost ubiquitous presence of non-banks in thepayment services area could be (a) the changing consumer behaviour with increasingdemand for more efficient and faster systems (b) advancements in technology which has 58 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013greatly facilitated innovations in payment services (c) trend for out-sourcing - possibly dueto objectives of reduction in capital investment by banks when the same task can beoutsourced on a fee-basis (d) financial inclusion drives where non-banks are also playing asignificant role especially in the field of mobile banking etc.18. Given the fact that this trend is gaining strength, particularly in retail payments,the role of banks vis-a-vis non-banks merits some closer examination. Especially, theaspect of cooperation between the two or the lack of it needs some introspection. In India,despite the poster-product of M-pesa in Kenya and other African country models led byMNOs, we have consciously chosen the path of a bank-led model. Further, it would also beinteresting to debate whether outsourcing is in itself a type of cooperation or is it just apaid service? Is there a level-playing field or is one partner the dominant one? And howwould systemic risk be addressed when there are players whose core business may onlybe relating to the payment system offered by them and any misdemeanor in this areamay well affect the entire customer base of the entity concerned?19. I am raising these issues here because they are very pertinent for the future andalso raise concerns for regulation. While healthy competition between banks and non-banks could have positive repercussions on the provision of cost-effective and efficientpayment services to users, it could also have negative impact in case of non-transparentprocesses and charges structure as well as issues pertaining to the continued sustenanceof the services offered. Further, increased risks, if any, due to presence of non-banks inpayments area also needs to be better understood and managed.Is the time ripe to review the role of the payment intermediaries?20. RBI has been aware of the critical role played by the intermediaries in theecommerce arena. The intermediaries provide platform for acceptance and processing ofpayments across multiple electronic payment channels. They offer payment aggregationservices to a large number of businesses (small to large), governments, utilities, banks,insurance companies, etc. They act as payment aggregators by obviating the need for amerchant / organization to set-up and manage a multiplicity of relationships withdifferent financial institutions - viz. banks, networks, wallets, prepaid issuers, etc. foraccepting payments. Over the years the volume and value of transactions handled by theintermediaries have grown manifold. Reportedly, there are the intermediaries who handledaily volumes of 6-7 lakh transactions for values Rs.150 to Rs.200 crore.21. Though these entities at present are not authorised, they have been advised tofollow directions on protection of customer funds. The growing importance ofintermediaries warrants a review of the extant oversight mechanism. Some of the areaswhich need attention are the need for intermediaries to provide complete andtransparent information to the customers on the success / failure of transactions;uniform and standard practice for refunds to the customers for failed / cancelledtransactions and related customer service issues. Another area of concern is theoperational risk that such entities may pose. As the customers, merchants and financialinstitutions depend on the intermediaries for payments / collections any disruption cannegatively impact the payment system. While some of the big merchants have"substitutability or "interoperability" arrangement in the form of payment gatewayswitching system, others fully depend on one intermediary. This underscores theimportance of the operational risk being effectively addressed by the intermediaries.22. Given the above, the need to continue with the existing light touch regulationsvis-a-vis a focused oversight including authorisation for such of those entities which have 59 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013a significant presence in the market would need to be explored. Further, theintermediaries perform certain niche functions which may not qualify to be part of thecore businesses of banks. When specialization and efficiency are existent, it would beappropriate to allow such intermediaries to play their roles, but with the added covenantsrelating to safety, business continuity, risk reduction and sustenance.Do we need a Payment Industry Council / Association encompassing allstakeholders?23. The payment landscape in India was for long primarily dominated by banks.Legislation of Payment and Settlement Systems Act, 2007 paved the way for entry of non-bank payment system operators. The payment system milieu covers an entire gamut ofstakeholders like banks, non-bank payment system operators, technology providers,outsourcing agencies, network providers, intermediaries, customers, government etc. Theincreasing complexities in payment system demands that all the stakeholders work intandem and collaborate. In the Indian scenario, the cooperation and co-ordination amongstakeholders is more critical considering the fact that a significant section of the society isunder-banked or unbanked. For example for mobile banking to leapfrog it is essential thatbanks and MNOs co-operate. Similarly, growth of PoS transactions would require co-ordination among merchants, banks, card networks etc.24. Against this backdrop the need for an industry-level association open to allstakeholders needs to be evaluated. There are several such association / payment councilslike European Payment Council (EPC), UK Payment Council, Australian Payments ClearingAssociation (APCA) Payments Association of South Africa (PASA), to name a few, whichprovide the necessary platform for partnerships, collaboration, advocacy, and awarenessaround payments eco-system in their respective domains. In the Indian context, theIndian Banks Association represents the banks but does not have representations fromnon-banks and other stakeholders. It is true that there are small associations such as inthe cards sector, but these are not all-pervasive across payment systems as a whole.25. Industry-wide payments council / association will provide an excellent platform tobrainstorm, collaborate and drive new technology proliferation, and thereby bring forthinnovative solutions to create a robust payments infrastructure. The need for such a co-operative platform was touched upon in the "Payment Systems Vision 2012-15" whichstated that the feasibility of forming a standard setting body under the overall guidanceof RBI with representation from IBA, IDRBT and other stakeholders would be examinedand taken forward.How will the White Label ATM (WLA) scheme help expand ATM network in India?26. Deployment of ATMs in India is witnessing a 30% y-on-y growth in the last fewyears. However, the deployment is largely restricted to the urban / metro areas whilelocations in Tier III to VI areas have not witnessed much ATM presence. Further, whencompared to other countries the per capita ATM deployment in India continues to lag.Given the recent policy initiatives in Financial Inclusion, it is expected that a large numberof bank accounts would be opened in Tier III to VI centres triggering a demand for basicbanking services including convenience banking through ATMs. Thus, there is a need forexpanding deployment of ATMs to increase availability and access especially in the ruralareas.27. Some of the reasons that were being attributed to the low deployment asindicated above were high cost of deployment and operation, inadequate supportinfrastructure, large requirement of human resources etc. The WLA concept exemplifies 60 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013the benefits of partnership between banks and non-banks in building the paymentinfrastructure. The banks need not lock their funds since the capital investment isundertaken by the WLA operator and the operator gets a fee plus other charges for everytransaction from the bank which has issued the card. RBI is in the process of authorisingthe first set of non-bank entities for operating WLAs.28. WLA scheme is a watershed initiative for bank and non-bank partnership inpayment space. However, the success would depend on how well the banks and non-bankentities complement each other. The efforts of non-banks to create ATM infrastructuresneed to be complemented by banks by bringing the financially excluded into the ambit ofbanking and issuing them cards, besides providing a mutually beneficial cashmanagement and settlement of transactions services. Further, banks and non-banks needto act in tandem in redressing customer grievances relating to failed transactions. RBIwould be closely monitoring the progress and proactively intervening when warranted.Consumer protection in electronic payments - a peek through the looking glass or aPandoras Box?29. Having raised the issues of discouraging the use of cheques, moving to electronicplatforms of payments, and the entry of non-banks into the payment domain, I also needto discuss one other important issue regarding consumer protection and rights inpayments. Just as it is well-understood that consumer behaviour does not change easily orquickly, it is also a moot point that some of the main underlying factors influencingcustomer choice relates to how transparent and secure the system is and how confidentthe customer is about getting a fair treatment in case of complaints / grievances. Often,the doubts the customer has about getting a raw deal tilts the scale towards traditionalpayments - cash or cheque - just so that the customer wants to avoid the hassles aboutfailed transactions occurring in a media (online, electronic) that is unfamiliar to him / her.30. Consumer protection issues mainly revolve around fraudulent and / orunauthorised transactions, unauthorised or excessive charges, failed transactions - non-delivery and rejections, late delivery of transactions, and disputes arising out of any or allof the above and complaint redressal. The catch is, as any banker would vouch for, whilegood consumer experience may not necessarily make for a second or repetitive use of themedium, bad consumer experience certainly creates a bitter feeling.31. Even globally, it can be said that the need for and the discussion about consumerprotection in electronic payments is a relatively new phenomenon as compared tocheques. Under cheques, consumer protection is provided by the nature of the banker-customer contract, which is not imposed by either of the parties but has been historicallydefined by practice as a series of common law cases (which is true in most countries).However, with the introduction of electronic funds transfer systems and also the entry ofnon-bank entities, many contractual terms and conditions began to be imposed onconsumers who often ended up bearing all the losses for unauthorised transactions.Gradually, many regulatory developments have taken place with the objective ofenhancing consumer trust in online payments including addressing the issue ofdisproportionate charges for services rendered, limiting consumer liability etc. Forinstance, the Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010 requiresthe Federal Reserve to establish standards for interchange fees that are reasonable andproportional to the cost of processing debit card transactions, the EU Directive onPayment services in the internal market (Directive 2007) provides rules on transparency,timing of payments and information requirements (including rights and obligations of 61 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013users and providers of payment services, liability rules etc.), EU Directive on ConsumerRights 2011 (to be implemented by December 2013 by all member states) aims toharmonise consumer protection in particular relating to purchase of digital contentproducts and in cross border transactions.32. How are we placed in terms of consumer protection and responsibilities of banksand customers in an electronic banking environment where physical transaction isreplaced by electronic transaction, physical trail is replaced by electronic trail, and aphysical signature is replaced with a digital one? How can we define the roles andresponsibilities of banks and customers in such an environment to achieve a win-winsituation for all? Is the customer really aware of his / her rights and responsibilities, ordoes the fine print put all the liability on the customer? Does the regulatory requirementof authorisation provide a sufficient safeguard for users of electronic payments? Are theexisting Consumer Protection Act, Banking Ombudsman Act, and other grievanceredressal mechanisms really up to handling issues arising out of payments systems arenawhich is increasingly getting electronic? Or does the law need to be strengthened furtherwhile focussing exclusively on consumer protection issues arising out of electronictransactions? Is there a need to dovetail Consumer protection with Consumer awarenessas well since there is a lot of synergy between these two requirements? For instance, evenas the RBI is taking steps to make Card Present transactions more secure, customerawareness can go a long way in enhancing customer protection while using Magstripecards at a POS terminal. A simple case in point is how many of us really pay attention tothe fact whether the merchant is checking the signature on the card during a transactionat the POS terminal? Today, matching the signature on charge-slip with that on the card isperfunctory. Should not this become a more serious exercise? I would encourage theBankers Club to arrange a Round Table to debate on these issues and come up with atechnical paper.33. As I conclude, let me also take this opportunity to provide some inputs on twoother areas which will see vast improvements in large value payments as well as bring inadditional messaging avenues - I am referring to the Next-Gen RTGS and the proposedentry of SWIFT for domestic messaging in India.34. The existing RTGS system was commissioned in 2004. The volume of RTGStransactions have grown over the years and currently settles approximately a volume ofaround 3 lakh transactions a day. This raised issues of scalability of the existing RTGSsystem which was developed to handle a volume of 50,000 per day. Further, it is a wellknown fact that RTGS, being a gross settlement system, is liquidity intensive system.35. The next generation RTGS (NG-RTGS) is structured to be equipped with liquiditysaving features, an advanced gridlock resolution mechanism, increased security measures,operational reliability, business continuity and be compliant with international standards.It would encourage inter-operability with alternative systems. The new system wouldendorse (a) the latest technology; (b) high scalability and flexibility to adapt to changes inthe financial environment and other requirements; and (c) enhance accessibility to copewith changes in the financial environment, such as globalisation of financial transactionsand networking of settlement infrastructures. It has been decided to adopt ISO 20022message formats in the NGRTGS system.36. Currently, there is only one messaging solution - SFMS available for domesticmessaging. In order to have an alternate messaging infrastructure, SWIFT has beenaccorded an in-principle approval for domestic messaging with specific terms and 62 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013conditions. The participants would have the option to choose multiple channels to routethe transactions to the central server in the Bank. The multiple channels are INFINET /SFMS, SWIFT and the Internet.37. One must recognise that payment systems have become a dominant factoraffecting our day to day lives and has the potential to spur economic growth as well.Coupled with its capability to be omnipresent and have a plethora of players with variedbackgrounds and interests, the need to ensure safe, secure and efficient payment systemsgains importance. It is this task which the Reserve Bank is now concentrating upon. Likeeffective teams which achieve success in their efforts, the various players in the paymentsystems space also need to work in unison, with the ultimate objective of ensuringcustomer satisfaction. It may be good to pause and examine in an unbiased mannerwhether this has been achieved or not. If the level of achievement is not substantialenough, then we need to work out strategies for ensuring that they are achieved. Forinstance, how do we move away from cash transactions? Can we for instance try this atpetrol bunks across the country? Can we implement wireless POS / mobile POS across thecountry for replacing all cashon- delivery payments to electronic payments, be it cookinggas or pizza delivery? I recall that more than two decades ago, it was this state whichwitnessed the introduction of new players in transferring payments from the Gulf - theprivate exchange houses which played a very specific role which was required at thatpoint of time. Today, as the country is looking with great expectations for innovations inpayment systems, can we look forward to an encore from the southernmost state of thecountry? Can the payment system operations in the Gods own country functionqualitatively and in terms of customer delight invoke even Gods envy?Thank you for your attention. Once again, wish you all a wonderful New Year.------------------------------------------1 Keynote address by Shri G Padmanabhan, Executive Director, Reserve Bank of India,to the Bankers Club, Thiruvanathapuram on January 2, 2013. Assistance provided by SmtC S Kar and Saswat Mahapatra in the preparation of the address and the comments /suggestions on the draft by S/Shri G Mahalingam, S Ganeshkumar, A Madhavan and SmtRadha Somakumar gratefully acknowledged. A Revolution in Monetary Policy Lessons in the Wake of the Global Financial Crisis Pro. Joseph E. StiglitzIt is a real pleasure for me to be able to deliver this lecture in memory of the Reserve Bankof Indias first Indian Governor, who set an example and a tradition which has resulted inthe Reserve Bank of India being viewed as one of the exemplars of central banks aroundthe world. As I shall comment later, one could not help but notice this in the aftermath ofthe 2008 Global Financial Crisis-which to a very large extent was brought about byfailures of central banks in the United States and Europe. C.D. Deshmukh understood notonly the importance of the financial sector to the functioning of an economy, but that to 63 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013ensure that the financial sector fulfills its roles requires regulation-otherwise, there is arisk that it wont do what it should and that it will do what it shouldnt. He did notsuccumb to ideology that has plagued central banks in so many countries : he understoodthat the state may have to play an important role in providing credit, either directly orthrough regulation, especially as part of the early stages of the development process andin the rural sector.The themes that I will take up today would, I think, resonate with Governor Deshmukh. Iwant to lay out a vision of what Central Banks should do, a vision that is markedlydifferent than that which was fashionable in the years before the Great Recession.It is understandable that the global financial crisis should give rise to considerablereflection among macroeconomists, and especially monetary theorists and policymakers.After all, their models didnt predict the crisis-the most important economic event in threequarters of a century. Economics is supposed to be a science, and the test of any science isits ability to predict; and if a sub-discipline cant predict something of this importance,then it suggests something is wrong.I say suggests because devotees of the model claim that there are always randomexogenous shocks that cannot be anticipated. But this crisis was not an exogenous shock :the credit bubble that brought the economy down was endogenous. It was a shockcreated by the market itself. And it was the kind of shock that the theory said couldnthappen : for if markets are rational, there wont be bubbles.This is but one example of the many flaws in the prevalent paradigm that were exposedby the crisis. In this lecture, I do not want to dwell so much on the flaws in the economictheories and models that dominated mainstream thinking, including thinking insidemany central banks, but on the central policy stances that typically followed-sometimesquite loosely-from those theories and models.These theories and models not only contributed to the failure to see the crisis coming, butled some leading central bankers to argue that its effects were contained, even after thebubble broke. They were also extra-ordinarily influential in shaping the policies that bothcontributed to the crisis and to its rapid spread around the world, and have contributed tothe lack of effectiveness in responding to the crisis. A half decade after the beginning ofAmericas recession, more than six years after the breaking of the bubble, unemploymentin Europe and America remains unacceptably high, the GDP in many countries is stillbelow the level attained before the crisis, a few countries are mired in depression, and theglobal economy is on the verge of another recession.In this lecture, then, I will enunciate 14 lessons for monetary policy that I believe emanatefrom the recession. Some are controversial. Most reflect a marked departure from thestances taken by at least many monetary authorities.1. Self regulation doesnt workThe notion that financial markets are self-regulating seems slightly quaint now, but weshould not forget how widespread and deeply believed that doctrine was. That that wasso is testimony to the ability of ideology to prevail over the lessons of history and theory.Financial markets have repeatedly been prone to bubbles, which when they burst wouldbring havoc in their wake. Conflicts of interest and predatory and abusive practices hadrepeatedly marked financial markets. These were among the reasons that the sector hadbecome highly regulated. To think that somehow, things would have suddenly changed,beginning around 1980, was sheer fantasy. 64 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Indeed, advances in economic theory had explained why unfettered markets-andunfettered financial markets in particular-were likely not to be efficient or stable, and whythey were likely to be marked by abuses and exploitation.The general theory of imperfect and asymmetric information, developed in the 1970s and80s, had shown that whenever information is imperfect and asymmetric (that is, someindividuals know things that others do not) and risk markets incomplete-that is, always-the economy is not likely to be (constrained) Pareto efficient. Adam Smiths invisible handwas invisible because it was not there. The theory also explained why risk markets arelikely to be incomplete-why key risks could not be insured against.The theory explained too why markets in which information was important were notlikely to be fully competitive-for instance, someone who offered the same product at alower price would not attract the entire market, as assumed in the conventional theory,simply because not everyone would know about the offer.Moreover such markets could well be characterized by rationing-unemployment andcredit rationing were real phenomenon, with important economic consequences.Finally, markets in which information problems were important were likely to be markedby severe agency problems-where those making decisions might not fully reflect theinterests of those on whose behalf they were supposed to be acting. Managers might notmaximize shareholder value, let alone societal welfare.These issues are of particular relevance to financial markets, precisely becauseinformation is at the center of what financial markets do. They are supposed to allocatescarce capital resources and manage risk, but what makes these tasks difficult andinteresting are information imperfections, ascertaining the returns and risks associated,for instance, with different assets, determining which risks are best suited for differentindividuals, etc. That Americas financial markets did an abysmal job in this, their centralfunction, should be obvious. The failures were not, however, that of a single bank, or anisolated banker : they were systemic, suggesting that the problems that gave rise to themwere systemic, as indeed they were.Further, the reason that we care so much about failures in the financial system (or even ofa single large bank) is that there are systemic consequences-there are large externalitieson the rest of the economy.The implication is that there is a need for strong governmental regulation of financialinstitutions. Much of the rest of this lecture will be concerned with the design of a goodregulatory system.This brings me to the second important lesson :2. Regulation is needed for a well-functioning market and economy.Financial sector regulation is required both because it is a sector characterized by largemarket failures, and where there are systemic consequences (large externalities) arisingfrom these market failures. Regulators need to bear this in mind, as they think both aboutthe need for regulation and its design. In subsequent sections (in particular, points 3-7below), I touch on the multi-faced nature of this regulation, a long list that includesensuring the safety and soundness of individual banks and systemic stability; maintainingcompetition; promoting access for all; protecting consumers and investors fromexploitation, predation, manipulation, and a wide range of abusive practices that havebecome part of every-day business in the sector; and enhancing transparency. Whileregulations and regulators may be imperfect, the track record of success-in India, and 65 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013even in the United States in the decades after the last great crisis, the Great Depression-shows that good regulation is both possible and can make a difference.In the aftermath of the financial collapse in 2008, Alan Greenspan, the chairman of theFederal Reserve, lamented about the flaw in his reasoning. He was surprised that thebanks had not managed their risk better. I was surprised at his surprise : after all, bankshad repeatedly not managed risk well. Why did he think they would do so in the twentyfirst century, when they had done such a bad job in previous centuries? Moreover, anyonelooking at the incentive structures facing banks and bankers should have understood thatthey had incentives to engage in excessive risk taking and short sighted behavior. Theyacted as any economist should have predicted that they would.Even if there had not been such perverse incentive structures, those in the financial sectorhave often been prone to irrational exuberance. Even Greenspan had commented on this.History was replete of instances of such irrational exuberance. What distinguishes banksfrom other institutions is that in this sector, irrational exuberance has systemicconsequences-there are large externalities. Bankers with irrational exuberance aregambling with other peoples money,But the problems go deeper. Bank managers and industry leaders often seem to showremarkable ignorance of some of the basic principles of risk-including the Modigliani-Miller theorem, which asserts that increasing leverage doesnt increase market value-itdoesnt create wealth, it simply shifts more risk upon the residual equity base. (Of course,there could be an increase in value because of market imperfections, either because (a)market participants are irrational, and dont fully understand the increased risk imposedon equity; (b) shareholders as a whole may gain because of the shift of risk to thegovernment, resulting from an increase in what might be termed the "bail-out subsidy";or (c) distortions in the tax code. But none of these are reasons to countenance anincrease in leverage.)Thus, the widely held notion in the banking community that increased capitalrequirements (say under Basel III) will increase the cost of borrowing either reflects aprofound misunderstanding of risk among those in the banking community; and / or theirunderstandable desire to increase the subsidy the sector gets from the public, disguisingthis in terms of the benefits to their customers; and / or their understanding of risk, buttheir understanding that other market participants dont understand risk.This implies that there should be strong regulations on the incentive structures of banks-itis not just the size of the bonuses that should be of concern, but the design. Higherdeposit insurance fees levied on banks engaged in higher levels of risk taking might alsodiscourage excessive risk taking, offsetting the implicit subsidy associated withgovernment bailouts. But because of pervasive irrationalities, we cannot rely on incentivestructures to curb excessive risk taking. There have to be strong restrictions on the risktaking, including the degree of leverage. Excessively rapid expansion of a banks assets,particularly within a given area, are almost a sure sign of excessive risk taking. There needto be "speed bumps." The costs of such restriction-a slight postponement of perhaps somesocially profitable lending-is far less than the benefit-avoiding the kind of financialcollapses that have occurred repeatedly.It is natural to ask why so many financial institutions chose to adopt incentive structuresthat seem so perverse. Traditionally, one of the purported virtues of the market economyis that it provides not just strong incentives but well designed incentive structures. Thathas obviously not been the case. The explanation lies in deep rooted failures in corporate 66 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013governance. Much of our thinking about the market economy is based on simple modelsof Marshallian nineteenth century economics, with little relevance to understanding thefunctioning of managerial and corporate capitalism of the twenty-first century. (Thisillustrates a more general theme, to which we return later in this lecture : The financialsector cannot be viewed as separate from the rest of the economy. It is affected by thelaws and mores that affect other sectors-laws like those related to bankruptcy andcorporate governance, and mores such as those that affect the acceptability ofexploitation and the primacy of material values and incentives. I will have little to sayabout these issues of social mores, except to note that as trust and social capital weakens,the need for public regulation is enhanced.)There needs to be deep reform of corporate governance laws, providing in particularbetter provisions for say in pay.The problems of distorted incentives are especially important with financial institutionswhich cannot be allowed to fail because of the systemic consequences. This brings me tothe third major lesson :3. Banks that are too big to fail, too interconnected to fail, and / or too correlatedto fail present a real danger to the financial system and the economyFinancial institutions which are too big to fail, too interconnected to fail, or too correlatedto fail have an incentive to gamble : if they win, they walk off with the profits, if they lose,the public picks up the losses. But the problems are deeper : banks have an incentive tobecome too big, too intertwined, and too correlated to fail; and because of the implicitguarantee that is provided to such institutions, they have an advantage over otherinstitutions. The private returns to growth in size and to interconnectedness exceed by alarge measure the social returns (which may, in fact, be negative.)One aspect of "correlated" risk taking is the herding behavior that marks credit bubbles.Such irrational bubbles are a major source of macroeconomic volatility. In the past,regulation has typically focused on the safety and soundness of individual banks, but oncewe recognize the central role of the correlated behavior of banks in causingmacroeconomic fluctuations, we have to ask how can we design a regulatory structure toreduce the scope and severity of such finance induced fluctuations.There should be strong regulations restricting the size and interconnectedness of banks.(Some of these restrictions relate to derivatives and CDSs, are discussed under point 6below.) Taxes on large banks should be levied to "level the playing field."Reducing the risk of "too correlated to fail" is more complex, and requires ensuring adiversity of financial institutions, with different ownership, incentives, and objectives. 8This argues strongly against the universal bank model. While more specialized financialinstitutions may face a greater risk of bankruptcy, the risk of systemic failure is greaterwhere all banks are universal banks, and the social costs of systemic failure is an order ofmagnitude greater than the costs of the failure of individual institutions. (Much of thatcost can be handled through diversification of the ownership shares.)Macro-prudential regulation is essential to prevent the growth of credit bubbles and otherforms of macroeconomic volatility. Of particular concern is collateral based lending-wherethe value of the collateral, and thus the magnitude of lending, increases in a bubble, thusreinforcing the bubble. By demanding high lending standards and increased collateral inboom periods, the financial system can act as an automatic stabilizer, rather than theautomatic destabilizer that it is under current arrangements.4. The Pervasive Imperfections in Competition need to be curbed 67 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013In most countries, the financial sector is far from perfectly competitive. In many markets,even in advanced countries, there are only one or two lenders to small businesses. In manycountries, banks have acted collusively to obtain outsized returns from their control of thepayments mechanism. In most countries, the persistence of returns that are far higherthan could be justified by effective competition in certain lines of business are suggestiveof limitations of competition.Imperfections of information naturally give rise to imperfections in competition, so weshould not be surprised that even in countries where there are many banks, markets arefar from competitive. Because markets that are fully transparent are more competitive,and less profitable, there are strong market incentives for reducing and impedingtransparency. That is just one of the reasons that we need strong regulation ensuringtransparency, including-and especially-for derivatives (see the discussion below).But even with reasonable laws governing transparency, effectively enforced (not thesituation today), in many areas within the financial markets competition is likely toremain limited. We can however circumscribe the worst practices. Modern technologyhas, for instance, made it possible to have an efficient electronic payments mechanism,where it would cost but a fraction of a cent to transfer money from a customers bankaccount to the merchant from which he has purchased a good. But the banks, in theirattempt to extract monopoly rents out of their control of the payments mechanism, haveresisted the creation of this kind of an electronic transfer mechanism.There need to be strong restrictions on credit card fees, interchange fees chargedmerchants, and other anti-competitive practices. Restrictions on the size and ranges ofbank activities and the interconnectness of banks would not only increase systemicstability, it would also enhance competitiveness.5. Consumer and investor protection : information asymmetries and exploitationIn most countries, the financial sector has been actively engaged in exploiting poorlyeducated and financially uninformed users. They have engaged in deceptive practices, andeven in market manipulation and fraudulent practices with seemingly sophisticatedcustomers. They have demonstrated a remarkable level of moral turpitude. This hascontributed not only to creating high levels of inequality-moving money from the bottomand middle of the pyramid to the top-but also to a lack of trust in markets and the marketeconomy. Markets cannot function well without such trust-and this is another way inwhich the banks have exhibited enormous adverse externalities. More generally, there arelarge costs to the sectors rent seeking activities--money doesnt move from the bottom tothe top costlessly; the benefits to those at the top are less than the losses to the rest.There needs to be strong consumer protection legislation, a regulatory framework alongthe lines of the US Consumer Financial Protection Bureau. There need to be strongrestrictions on usury, overdraft fees, credit card fees and penalties, predatory lending, etc.But the consumer protection agency needs to do more than just protect against abuses ofthe private financial sector. It needs to innovate-to design, for instance, mortgageproducts that help ordinary citizens manage the risks of home ownership.The London Interbank Offered Rate (Libor) scandal illustrates the potential depth of theconsequences of unfettered markets : there is a $350 trillion derivative market andsomewhat smaller loan market indexed to a number that we now know is manipulatibleand manipulated, that doesnt represent what the words seem to suggest it represents. 68 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The continuation of the market linked to Libor is itself scandalous. There is ampleevidence that even today it does not reflect any true lending rate : is it conceivable thatinterbank lending rates for a particular bank whose cdss spread have soared barely move?Contracts should be indexed to T-bill rates, which are less manipulable, and may be evenmore linked to the kinds of risks which these indexed contracts are suppose to handle.But even if the T-bill rate is less correlated with the risks that individuals care about, theadvantages in the reduction of potential for manipulation and exploitation make themovement away from Libor desirable.6. Derivatives and CDSs : We need to make Markets Work like MarketsDerivatives and CDSs bring together many of the issues discussed so far : the market is farfrom competitive, with a few big banks deriving significant returns (in the billions) fromthese activities, making it understandable why they resist regulation so strongly. The lackof transparency facilitates market manipulation and a lack of competition, enhancingbank profits, but at the same time posing significant systemic risk, which became soevident in the 2008 crisis. There is also an element of regulatory arbitrage, or what mightmore accurately be described as regulatory deception. If regulators treat a banks holdingof a risky bond combined with a CDS (supposedly an insurance policy on the bond) as ifthe bank were holding a safe asset, it allows the bank to lend more money-to leverage itsportfolio even more. But the insurance may be phony insurance-sold at a low pricebecause the benefits would never be paid by the insurance company because in the eventof the insured against event occurring, the insurance would default : this was preciselywhat happened with AIG.Moreover, by failing to net out their positions and by not trading through exchanges, thebanks increase systemic risk and reduce transparency, another instance of externalitiesimposed upon others. Indeed, they reduce the overall efficiency of the market, since thestandard arrangements undermine principles of market decentralization. For example,with large credit default swaps not cleared through an adequately capitalized clearinghouse, knowing the risk of default of any one firm required knowing the risk position ofevery firm with which it was financially interlinked-in a vast, difficult, simultaneousequation system.Transparency and the euro-crisisThe euro crisis has once again brought out the consequences of the lack of transparency inderivative positions. No one knew for sure the full consequences of a Greek restructuring,partly because no one knew who bore the risks, or what banks may have taken aspeculative positioning. One of the explanations for the ECBs hard-to-justify position thatthe restructuring should be done in a way that was not a credit event-that is, so that thebanks who had bought insurance would not be repaid-was that they were moreconcerned with the banks who had taken a speculative position.Government insured financial institutions (whether the insurance is explicit, or implicit-asa result of being too big to fail) should not be allowed to issue derivatives. While it is notclear whether such financial products are insurance products or gambling instruments,they are not loans, there is no justification for government encouraging them throughimplicit or explicit insurance. There is no evidence of compelling economies of scope tooffset the market distortion arising from such subsidies.Derivatives should be traded over adequately capitalized exchanges and positions shouldbe transparent. Some critics have worried that trading over exchanges will concentraterisk; there could be systemic consequences to the failure of an exchange. The response is 69 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013to increase capitalization and to require all those who make use of the exchange to bejointly and severally liable for the losses. The rest of society should not have to bear theconsequences of their failure at risk management.It should be clear that Dodd-Frank went only a little way towards addressing the problemsposed by derivatives. A fundamental flaw of Dodd-Frank was that it did not recognize thedeep disparity between private rewards and social returns; it did not recognize thatmarket participants had incentives to design transactions in ways that increased systemicinstability and decreased the economys efficiency, either in gathering and disseminatinginformation or in assessing or distributing risk.Derivatives and other new financial productions were championed as part of financialinnovation. But as Paul Volcker pointed out, it was hard to see that any of this financialinnovation had led to faster real economic growth. It had contributed to more inequality-to greater wealth for the bankers-but it was hard to see societal benefits. Indeed, it hasbeen associated with more instability.We now understand better why that is the case. Much of the financial innovation was notdirected at improving the efficiency of the economy and enhancing the ability of ordinaryAmericans to manage the risks which they faced. Some of the innovations were directedat improved ways of exploiting poor Americans;some at regulatory arbitrage; some atnew forms of market deception. In each of these cases, there were marked discrepanciesbetween social and private returns. Whenever there are such discrepancies, not only willmarkets not be efficient, innovation will not be directed at enhancing societal welfare.The one part of the agenda that seemed to have some rationale was called "completingthe market." Since the earlier work of Arrow and Debreu, one of the widely recognizedmarket failures was the absence of key risk markets. The notion was that the newproducts enabled individuals to manage risks better. Ironically, they were typically pricedby using "spanning" theorems-the new products were viewed as a linear combination ofexisting products, or at least near enough so to be able to base prices on these relatedproducts. In this view, the real advantage of the new products was the lower transactionscost. But as those in the financial sector heralded these benefits, total transactions costssoared-to the point that just profits in the financial sector amounted to 40 percent of allcorporate profits.But there is a basic result called the theory of the second best, which says that when thereare many market distortions, eliminating one of them may actually make matters worse.In the presence of imperfect risk markets, for instance, removing trade barriers may makeeveryone in both countries worse off. In the presence of imperfect risk markets, capitalmarket liberalization may increase volatility in consumption and make the economyworse off.In this case, matters may be even worse. When individuals have different assessments ofrisk (the probability of a given event), they can through buying and selling derivativescreate pseudo-wealth-both parties believe that they will win the bet, and hence bothbelieve that they are well off. In reality, of course, this is just a zero sum game, and nextperiod, one will be proven right, the other wrong. But at that point, there can be largedestruction of this pseudo-wealth, with severe macroeconomic consequences. Of course,if only two individuals engaged in such bets, the macroeconomic consequences would benegligible. But when they are engaged in by large numbers, there can be severeconsequences. 70 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013This provides a still further reason for restricting derivatives-or at the very least, makingsure that they are not facilitated and subsidized, implicitly or explicitly, by governmentpolicy.Unfortunately, not only do we encourage the derivatives through allowing them to besold by government-insured institutions, we implicitly encourage them throughbankruptcy laws that give them priority in bankruptcy.It is imperative for government to try to correct discrepancies between social returns andprivate rewards because in the presence of such distortions, not only will markets beinefficient, but innovation will be misdirected.Legal frameworks-corporate governance laws, competition laws, bankruptcy laws,financial sector regulations-provide the rules of the game, affect the distribution ofincome and the relationship between social and private returns, and can be thought of asproviding (implicitly) the basis of industrial policy, encouraging some sectors at theexpense of others. The legal framework in some countries, such as the United States, hasresulted in a distorted and bloated financial sector. For example, among the reformsneeded in our bankruptcy law are the following :Bankruptcy law should treat derivatives junior to workers and senior creditors. Bankruptcylaw should be used to encourage transparency : any derivative not registered would bejunior to all other claimants; and losses on derivatives that are not fully disclosed wouldnot be tax deductible.7. The shadow banking systemPrior to the crisis, many thought that the shadow banking system did not pose systemicrisk. An investment bank that failed would (some believed) have no systemicconsequences. We now know that that is not true. Even a large insurance company canpose systemic risk.Much of the shadow banking system arose to circumvent regulations imposed oncommercial banks. And much of the theory providing justification for the shadow bankingsystem has been put into question by the crisis. For instance, while the benefits of riskdiversification through securitization are well recognized, the crisis has exposed thedownside to securitization :One of the arguments for institution- (bank-) based lending is the internalization ofinformation externalities. Securitization offered advantages in risk diversification, butthese advantages were more than offset by the attenuation of the quality of information.A great deal of attention has been focused recently on the failures of the rating agencies;but the problems associated with the inadequacy of incentives for gathering goodinformation are partially inherent and have long been recognized : if markets perfectlyconveyed information (as the advocates of informationally efficient markets claimed),then there would be no incentives to gather information. Earlier, we noted that privatedecisions with respect to sharing and transferring risk are not, in general, socially optimal.Even worse, the way private markets balance risk and information efficiency is not, ingeneral, optimal. Systems that disperse risk inherently weaken "accountability" andincentives not just for gathering information, but for ensuring the "quality" of thefinancial products being produced.If diversification leads to an attenuation of incentives for obtaining good information, itcan lead not only to poorer overall performance, but more instability. Hence, the trade-offis markedly different than has traditionally been envisaged in the securitization literature,where it was presumed that securitization would lead to enhanced systemic stability. 71 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Different policy frameworks (rules of the game) can lead to different financialarchitectures; and different financial architectures balance the trade-offs differently,some better than others, some enhancing the ability to absorb small risks, but making theeconomy more prone to systemic risk in the event of a large shock, or a set of correlatedsmaller shocks.The shadow banking system has to be tightly regulated, e.g. with tight leverage (capitaland liquidity) requirements-and because wholesale deposits may be even more fickle thatconsumer deposits in commercial banks, the requirements may even have to be higher.Originators of securities have to have "skin-in-the game," i.e. they have to retain at least a10% stake in the security.There need to be deep reforms in the credit rating agencies. The quasi-public role(delegating responsibility in ascertaining which securities are safe enough to be held by apension fund) needs to be re-examined. There needs to be standardization of the ratings.There needs to be a rating of the rating agencies performance. They need to be held moreaccountable. (Litigation in Australia where the credit rating agencies were found culpableis a beginning in doing so.)8. The centrality of banks and the necessity of central banks using a full range ofinstrumentsBanks, and their failures, were central to the crisis of 2008. But curiously, banks play littlerole in standard macroeconomics models, in which the financial sector is oftensummarized in a money demand-and-supply equation. These models typically didntmodel the banking sector carefully-or at all. Such a reduced-form approach may suffice innormal times, but not now, or in other times of crisis, such as the East Asia crisis.The importance of banking (including the shadow banking system), as opposed to theprovision of credit through markets, is rooted in information economics. In particular, theyare the repository of institutional knowledge (information) that is not easily transferred,and the internalization of information externalities provides better incentives for theacquisition of information, but, as we have noted, at the cost of a lack of directdiversification of risk.It should now be clear why an analysis of banking has to be central in any macroeconomicanalysis : A key channel through which monetary policy affects the economy is theavailability of credit and the terms at which it is available. It is the lending rate that firmscan borrow at that they care about-not the interest rate at which the government canborrow. The spread between the two can and does vary greatly; banks are central to thesetting of the lending rates at which small and medium sized enterprises can borrow.Government policy can affect the spread through both conventional monetaryinstruments and a variety of regulatory policies, and monetary authorities need to besensitive to the various market forces which might affect the spread, so that they couldtake offsetting actions.If we are to understand the impact of monetary policy, we must better understand howwhat Central Banks do (either in conventional open market operations, reserverequirements, interest provided on reserves, or regulatory requirements) affects thebehavior of banks and the shadow banking system. This is especially so because banks arestill the locus of most SME borrowing, and because variability in SME investment andemployment is central to understanding macroeconomic variability.Greenwald and Stiglitz provide a beginning of a research program of creatingmacroeconomic models where banks play a central role and are explicitly modeled. Credit 72 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013availability too plays a central role-rightly so, because credit markets are oftencharacterized by credit rationing. If there were no credit rationing, there would be noliquidity crises.Already, though, there are clear policy prescriptions both about policies aimed at macro-stability (preventing crises) and in restoring the economy after an economic crisis-prescriptions that may differ markedly from those arising out of the standardconventional (DSGE) models.Quantities (credit availability) and liquidity can be as, or more important, than interestrates.The interest rate that matters is the lending rate, not the Treasury bill rate, and thisshould be the focus of attention.Credit availability and the terms at which banks lend money is affected by the T-bill rate(which in turn is affected by open market operations) but also by a host of regulatorymeasures, such as capital requirements. These regulatory instruments have first ordermacroeconomic consequences and should be treated as macroeconomic instruments. Insome cases, they can be far more effective. Increasing margin and down paymentrequirements would have been far more effective in curbing the tech and housing bubblesthan just adjusting interest rates.Changes in technology and market structure and some regulations can affect theeffectiveness of other instruments. In particular, the elimination of regulation Q hasmeant that changes in T-bill rates have a smaller wealth-effect on banks, so that much ofthe effect of conventional monetary policy is through substitution effects, which typicallyare far weaker.Most importantly, central banks need to use all of the instruments at their disposal. Theartificially self-imposed constraint adopted by many central bankers influenced by neo-liberal doctrines-that central bankers should limit themselves to adjusting short terminterest rates-has been costly. It was predicated on the false notions that markets werealways efficient, and therefore central banks should minimize their interventions. But allcentral banks intervene-that is why they were created. And there is no theorem that saysthat optimal intervention should be limited to short term rate setting. Indeed, in othercontexts, such as tax policy, we know that optimal intervention (taxation) involvesimposing a multiplicity of interventions (taxes)-it is better to have a large number of smallinterventions than one large intervention.The crisis has forced many Central Banks to rethink their doctrinaire policies. Even the Fedhas become more active in the use of alternative instruments. I should say a word a fewwords later about one such instrument, quantitative easing.9. Broader objectives-beyond inflation-as well as more instrumentsIn the aftermath of the crisis, it is evident that the single-minded focus of some centralbanks on inflation was misplaced. The losses in welfare from low to moderate inflationwere of orders of magnitude smaller than the losses from the financial collapse. But theunderlying hypothesis, held by many central bankers, that keeping inflation low wasnecessary, and almost sufficient, for stable and strong growth has been shown to bewrong-and was never really justified by sound economic models. By diverting attentionfrom what was really important, inflation targeting may accordingly not only have failedto enhance macro-stability, it may actually have contributed to instability. (Of course, highlevels of inflation are a problem, but they are often symptomatic of other more generalproblems in the economy.) 73 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The period immediately before the crisis showed another aspect of the destabilizingeffects of inflation targeting : developing countries exposed to an adverse supply shockwhich results in "imported" inflation increased interest rates, slowing the economy downeven more, and imposing even greater costs on workers already suffering from high foodand energy prices. The only way that the increased interest rate would have had asignificant effect on inflation was by imposing such stress on the non-traded sector andon wages that prices of non-traded goods and labor declined enough to offset the risinginternational prices. But then the cure would have been worse than the disease.The more general point is that the response to any shock to the economy should dependon the nature of the shock. If it is, for instance, a demand shock, then it may beappropriate to curb demand through interest rate policy.This and the preceding point illustrate another more general one : for years, Tinbergensapproach to policy has been extremely influential. If the number of instruments equalsthe number of objectives, it has been argued that one should "match" instruments withobjectives, and different institutions should be assigned an instrument and a target forwhich they are responsible. The central bank should be responsible for inflation, using itsinstrument of choice, the interest rate. Tinbergen focused on controllability, but thissystem has been argued for on the basis of accountability : there is a simple metric (thelevel of inflation), in this view, by which central bank performance can be judged.But Tinbergens analysis was conducted in a highly stylized linear model, in which with ninstruments one could control n objectives. In a complex non-linear system with risk-including instrument uncertainty-and where one is concerned not just with the ultimateequilibrium (which in practice may never be attained) but with real-time performance--one should use all the instruments at ones disposal, and coordination amongpolicymakers is essential. There are no general theorems on decentralization-to thecontrary, what theorems we have relate to the dangers of decentralization.In practice, this means that monetary and fiscal policy needs to be coordinated, and itmakes no sense for the body controlling one of these to be allegedly independent, whilethe one responsible for the other is politically accountable, a point to which I shall returnshortly.Central banks should broaden their objectives beyond inflation. They need to focus too onemployment, growth, and financial stability. And monetary policies need to becoordinated with fiscal policies.10. The complex effects of monetary policy : asymmetries, irreversibilities,sectoral effects, distributional effectsMonetary authorities need to be especially sensitive to asymmetries in "controllability"and the costs associated with the conduct of monetary policy. While monetary policy maybe an effective instrument in constraining output, it may be far less effective instimulating the economy in a deep downturn. This, in turn, implies asymmetries in theconduct of monetary policy. There is always going to be uncertainty, for instance injudging the level of employment or growth at which inflation starts to increase or injudging whether there is a bubble. But a slight restraint on the economy in dampening apotential bubble has a miniscule cost relative to the costs imposing by the breaking of abubble.This is an example where there are long-term, hard-to-reverse effects of mistakes. Thereare other examples : prolonged high unemployment gives rise to hysteresis effects, asskills atrophy. 74 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013So too, advocates of monetary policy as a control instrument (over fiscal policy) stress itsflexibility, the ability to fine tune policies as new information comes in. But they fail tonote that some parts of the economy are more interest-sensitive than others, and someparts are more sensitive to the availability of bank credit than others. Hence loosening andtightening of credit induces more volatility in some sectors than others, and because ofimperfections in risk markets, this imposes significant costs on these sectors. In a sense,the way monetary policy is conducted distorts the economy.At the same time, the way monetary policy is conducted can have significantdistributional effects. While it is often asserted that inflation is the cruelest tax, inadvanced countries at least we have protected the poor against much of theconsequences, since social security and other programs are often indexed to inflation.With competitive labor markets, wages tend to rise with inflation, and so even workersare protected. (Sometimes it seems that this is not the case, but that is because the shocksto the economy that set off inflationary episodes often are shocks that affect laborproductivity; we confuse correlation with causation.) Inflation has redistributive effects--against holders of long term bonds. But fighting inflation by raising interest rates andincreasing unemployment also has distributive effects-not only is the cost of the higherunemployment borne directly by workers, but workers suffer doubly as the higherunemployment exerts downward pressure on wages, and triply, as lower GDP leads tolower tax revenues and cutbacks of public programs aimed at the bottom and middle.Not only have monetary authorities often failed to note the significant distributive effectsof their policies, the models on which they rely have not given them the prominence thatthey should. Even if one did not put much weight on inequality, inequality can have largemacroeconomic effects. My own work (summarized in my recent book The Price ofInequality) highlights this. So too did the International Commission of Experts appointedby the President of the UN General Assembly examining the causes of the 2008 crisis. 19And so too has the IMF, which has noted the systematic relationship between inequalityand instability.While I cant in this brief lecture go into all the channels through which this occurs, let menote one that was evident in the run up to this crisis. As incomes of most Americansstagnated and declined, they incurred greater indebtedness as they strived to maintaintheir standards of livings and to keep up with those at the top who were doing so well.Had monetary authorities not offset the effects of growing inequality (because themarginal propensity to consume of those at the top is so much lower at the top than atthe bottom and middle, as income shifts from the middle and bottom to the top totalconsumption demand is lowered) by lowering interest rates and relaxing regulations,thereby helping create a housing bubble, aggregate demand would have been lowered,and unemployment would have increased. But such actions provided only a temporarypalliative. The temporizing was sowing the seeds of destruction : it was simply a matter oftime before the bubble which sustained the economy, offsetting the effects of thegrowing inequality, broke. But the period of recovery, during which actual output remainssubstantially below potential output, may be longer and the costs far greater than thebenefits and duration of the bubble. And this is especially so when the underlyingproblem is not addressed; for the downturn itself gives rise to adverse distributionaleffects which weaken the economy further.Monetary authorities need to be more sensitive to the distributive and sectoralconsequences of their policies, and to the fact that some mistakes--letting bubbles grow, 75 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013or allowing unemployment to rise in an excessive zeal for fighting inflation--have longterm consequences which are hard to correct.11. Limited effectiveness of monetary policy and the channels of monetary policy: exploiting market imperfectionsThis discussion has highlighted one of the lacuna in the models used by many monetaryauthorities--the lack of attention to distribution. Earlier remarks highlighted other lacuna--the lack of attention to banks and the details of the financial system more broadly. Butthese are not just mistakes of modeling, about which I have written more extensivelyelsewhere, but they lead to misguided views about the channels through which monetarypolicy affects the economy, and indeed, the very reasons that monetary policy affects theeconomy. And without understanding these channels, one cant understand whysometimes monetary policy is less effective than at other times, nor can we designpolicies to maintain stability or restore the economy to full employment.The effectiveness of monetary policy hinges critically on certain market imperfections.Some years ago, I proved a generalization of the Modigliani-Miller (MM) theorem, whichhad shown the irrelevance of corporate financial policies, for the public sector. I showedthat, under the idealized conditions under which the MM theorem held, public financialoperations, such as a change in the maturity structure of government debt, should haveno effect. (The result could also be thought of as a generalization of the Barro-Ricardotheorem, suggesting that government debt itself had no effect.) In a simple model withinfinitely lived individuals, putting aside any distributive effects, we owe money toourselves, so government debt is simultaneously a liability and an asset. That that is soprovides an important critique to those excessively worried about government debt, atleast when it is internally held (its another matter when the debt is held by foreigners,because then the debt amounts to a diminution in the countrys "net worth.")The intuition, of course, is simple, and it is the same that underlies the Barro-Ricardoanalysis (in its general equilibrium form) : if the government borrows more now (say,instead of paying for current expenses by raising taxes), to be repaid at some later date,the effect can and will (in general equilibrium) be precisely offset by the representativeconsumer saving more, and using the funds to repay the government debt later. But in thegeneral equilibrium formulation, there can be multiple heterogeneous individuals, andthe result holds, assuming, of course, that those who would have paid the taxes now paythe "equivalent" amount later, i.e. that there are no distributive consequences to thepostponement of the taxes. And the same holds if the government decides to raise morefunds by a sequence of short-term borrowings, rather than by long term debt.The empirical evidence is overwhelming that the Barro-Ricardo theorem, and mygeneralization of it, are wrong. The question is not the validity of the proposition, but whyit fails. And what insights does this provide us into capital markets and the workings ofmonetary policy?Distributive effects, capital constraints, and seeing through the public veilIt should be obvious, as we have already noted, that it is hard to avoid distributive effectsand political economy considerations (the absence of which are essential to the validity ofthe Barro-Ricardo result). In the limiting case, with an overlapping generations model, thedecision to postpone financing for current expenditures through taxes has potentiallyimportant intergenerational effects. To be sure, there may be partially offset throughchanges in intergenerational transfers, but the fact is that most individuals do not leave 76 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013any significant bequests to their children, in which case there cant and wont be suchoffsetting bequests.A variety of capital market imperfections provide the basis of the strongest theoreticalcritique. If, for instance, individuals would have want to have borrowed more, but areconstrained from doing so, the existence of an incremental future liability will not inducethem to start saving. The borrowing constraint will simply be less binding than it wasbefore. By the same token, were the government to decide to tax more and borrow less,the individual facing a borrowing constraint wont be able to offset the effect throughincreased borrowing.In reality, most individuals do not fully incorporate future tax liabilities into their budgetconstraints-and even less so, do they incorporate the "risk pattern," so that changes in therisk pattern, as a result of a change in say the maturity structure of debt (or a shift fromunindexed debt to indexed debt) are not offset by corresponding changes in theirportfolios. (As another example : as the Fed bought long term bonds, there was theobvious risk that should it reverse the purchases as the economy recovers, there would bea capital loss. The expectation of such a capital loss, with full integration of the public andprivate budget constraints, should have had a contractionary effect on consumption,offsetting the intended expansionary effect. The Fed suggested it might hold the bonds tomaturity, using other ways of tightening credit, e.g. by paying interest on deposits at theFederal Reserve, in effect enabling it never to realize the capital losses. But these onlymask the reality that (the present discounted value of) government revenues are less thanthey otherwise would have been; they dont change the predicted adverse effect onconsumption, assuming full integration of public and private budget constraints and fullrationality. )Monetary policy in a world of interest bearing moneyIt is clear that the idealized world of Modigliani-Miller provides an inadequate descriptionof the economy. There is a widespread assumption that monetary policy has some effects.But modern monetary theory lives in a half-way house of incompletely articulatedassumptions of imprecisely defined market imperfections and distributive effects, leadingto speculative observations about possible channels through which monetary policymight yield effects, with ambiguous quantitative significance.Today, for instance, with cash management accounts, T-bills can, in effect, be used asmoney for purposes of transactions. In the standard model in which interest rates aredetermined by the demand and supply for money, an open market operation entailing anexchange of T-bills for, say, "money", doesnt change the effective supply of money, sinceT-bills themselves can be used for transactions, and so such an exchange (open marketoperations) shouldnt have any effect on interest rates. And this is especially so in a worldin which T-bills are yielding close to zero nominal interest rates.Institutional constraints, credit availability, profit maximizing risk-averse firms, and theliquidity trapBut it is possible in a world of banks with institutional rigidities that such open marketoperations could have an effect. For an increase in deposits held by the banking system inthe Federal Reserve ("base money") can, through the credit multiplier, lead to increasedlending. I say, can, not necessarily will. For banks are (for the most part) profit maximizingrisk averse firms, and they may decide the best way to allocate their portfolios is not toissue new loans to, say, SMEs, but to buy government bonds from the household sector orfrom abroad, or simply to hold the excess liquidity at the Fed. This can give rise to a 77 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013liquidity trap, though one that is distinctly different from that discussed by Keynes (whereit arises because the demand function for money becomes infinitely elastic at low interestrates) and some more recent commentators focusing on the zero lower bound on theinterest rate.We have already referred to one reason that today, monetary policy may be much lesseffective than in the past : with the abolition of Regulation Q, restricting competition inthe setting of deposit rates, the wealth-effects of monetary policy are largely eliminated,implying that monetary policy exerts its effects through much weaker substitutioneffects.But in deep downturns, there are two further reasons for the inefficacy of monetary policy: the interest insensitivity of investment (and consumption) and the blocking of creditchannels, so that the impact of monetary policy on the flow of credit is diminished.The distinction between the situation confronting Keynes in the Great Depression andthat of today is important : Keynes was confronting a situation where prices were fallingat 10% a year, so real interest rates remained in excess of 10%, so it was plausible that theinability to lower real interest rates represented a constraint on the ability of monetaryauthorities to ignite the economy. Today, however, there is moderate inflation, of say 2%,so that real (T-bill) interest rates are negative. To be sure, at a sufficiently negative realinterest rate, individuals might be spurred to consume more and firms to invest more, butwithin reasonable ranges, further lowering (expected) real T-bill interest rates, to say -4%-even were that feasible- is unlikely to spur much further investment or consumption.There are some obvious reasons for this interest inelasticity : with firms sitting on excesscapacity, even large changes in interest rates are not likely to induce much moreinvestment. Why would firms acquire even more excess capacity, just because the interestrate is lowered? Moreover, as Greenwald and I have explained in our earlier work, becauseof information imperfections, capital markets are imperfect; and because of capitalmarket imperfections, firms act in a risk averse manner. In deep downturns, firms arelikely to be particularly risk averse, and so particular unresponsive to even moderatechanges in interest rates.Today, large firms are sitting on some $2 trillion dollars of cash. It is hard to believe thatsmall changes in T-bill rates are going to result in large changes in their willingness toconvert those cash holdings into real investments.For many smaller businesses, however, the real constraint is the lack of availability ofcredit (a problem that simply cannot be analyzed in a model with perfect capital markets).For these firms, credit availability is far more important than interest rates. Providingmore liquidity to banks does not necessarily lead either to more lending or to lowerlending rates (Greenwald-Stiglitz, 2003).The ineffectiveness of temporary interventions : QE as an exampleOne of the arguments often put forward in favor of monetary policy is its flexibility-theability to change interest rates quickly up and down. But while that is undoubtedly anadvantage (over the much slower process of adjustments of tax rates or governmentexpenditures-though not of well-designed automatic stabilizers built into sound fiscaland financial frameworks), there has been a long standing theoretical conundrum : whyshould policy measures that are seen to be (and often announced to be) temporary havemuch of an effect?Consider, for instance, the temporary intervention of Quantitative Easing-buying longterm bonds now, under the presumption that the economy will recover in say a couple of 78 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013years, in which case the action will be reversed. Apart from slight changes in endowments(increases in the levels of state variables like human and financial capital) that might havebeen induced by the temporary intervention, at the later date, asset prices will be thesame as they would have been before the intervention. Knowing this, it is hard to see whythere should be large changes in asset prices (share prices) today. With lifetime budgetconstraints essentially unchanged, it is hard to see why there should be any significantchanges in consumption during the period of the temporary interventions, even if thereshould be some changes in asset prices during that period.Moreover, as we noted earlier, the capital gain on long term government bonds thatindividuals might enjoy today as long term interest rates fall will be offset either by acapital loss on their holdings when the intervention is reversed and / or by the capital lossthat the government will realize when it sells back the long term bonds back to the publicat a time when long term interest rates are lower. If public and private life-time budgetconstraints are largely integrated, then these effects are offsetting, and it is hard tobelieve that there will be large effects on aggregate demand.Market imperfections and why QE may have some effectsOf course, in models with less than perfect rationality, high degrees of risk aversion, andsignificant capital market imperfections, such temporary interventions can have someeffects.The financial press continually describes the response to low interest rates as leading to a"drive for yield." There is, of course, no general theory that would suggest that as yields godown, individuals act in a less risk-averse manner; quite the contrary, the adverse wealtheffects might more plausibly lead to more risk-averse behavior. But such behavior, ifwidespread, could in turn lead to an increase in the price of stocks-even if "rationally" theforces leading to this increase (above what the prices would otherwise be) are justtemporary. The standard wisdom from the advocates of QE are that the higher stockprices will lead to more consumption. We have questioned, though, whether that is so, ifthey rationally expect the intervention to be temporary.But there is a more fundamental problem : if the reason for the increase in stock prices isthe "drive for yield," then it reflects a worsening of the life-time budget constraint as aresult of lower interest rates, and net, that should have ambiguous effects onconsumption, with wealth and substitution effects operating in opposite directions.But there is another set of effects that may be operating that may also imply that QE canhave an adverse effect on consumption (and aggregate demand). The standard modelignores the effects of distribution, including across generations. Those that go intoretirement at, say, t, and had been planning to sell their assets, will, if QE results in anincrease in stock or bond prices, now receive more from them that they otherwise wouldhave received, and this group may consume more than they otherwise would have.But once we start focusing on distributive effects, we need to take into account othereffects associated with the lowering of interest rates : those prudent older people whohad invested in say government bonds will find their incomes lowered as interest ratesare reduced, and for many of these, a lowering of income translates quickly into alowering of consumption. Their consumption is cash-constrained, and their cash flows willbe diminished.There are many other potentially significant effects that are typically ruled out in the"standard" model : lower interest rates lead to more capital intensive technologies, layingthe seeds for a "jobless" recovery; lower interest rates can lead to asset price booms, 79 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013increasing the prices of oil and other commodities which act much like a tax onconsumers.Market imperfections and the ineffectiveness of QEWhile capital market imperfections help explain why monetary interventions like QEmight have larger effects than one would have expected in a "perfect markets" model,capital market imperfections also help explain why QE may have less of an effect thanexpected. (The most important reason for the limited effect of QE in the United States isglobalization of financial markets, and that is discussed in the next part of this lecture.)As we noted earlier, what matters for aggregate demand is the availability of credit andshort and long term lending rates, and even with quantitative easing, credit availabilityand the spread between T-bill rate or other rates set by the Fed and the lending rate areendogenous variables. In deep downturns, changes in conventional monetary policies mayhave limited effects, especially if the monetary authorities have not done what theyshould have done to ensure the health of the institutions responsible for the flow ofcredit.One of the hoped for effects was that lower long term interest rates would lead to lowermortgage rates, which in turn would lead to large numbers of Americans refinancing theirmortgages, and the lower interest rates would effectively put cash in the pockets ofhouseholds, leading to more consumption.Note that underlying this analysis are implicit assumptions about distributive effects ofinterest rate changes. Lower interest payments by households corresponds to lowerreceipts of interest by lenders. In representative agent models, the effect would be a wash.More realistically, given large differences in the marginal propensities to consume ofcreditors and debtors, the redistribution from creditor to debtor should increaseconsumption (as the advocates of QE hoped. In the presence of capital constraints(limiting borrowing by households), the effect is even stronger.However, in more general models focusing on capital and institutional constraints, theeffects are more complex and ambiguous. For instance, in the presence of institutionalconstraints on banks, lower revenues / profits for the banks translates into less lending,an effect which could be stronger than that generated by differences in marginalpropensities to consume.The many and growing imperfections in the mortgage market help explain theineffectiveness of monetary policy, including quantitative easing. There has beenincreasing concentration--to the point where no one would describe the market as acompetitive one. Without precisely specifying the appropriate model of tacit collusion oroligopoly, it is certainly conceivable that the banks would not pass on to consumers thefull benefits of the lower long term government rates; they would limit the supply ofmortgages so much as to increase their spread, their profit margins. And this is preciselywhat has happened. (This is especially the case because of the multiplicity of conflicts ofinterests that have been creating under existing institutional arrangements. The banksalso derive large revenues as "service providers," from servicing existing mortgages, andthe contracts as service providers also provide them with incentives not to refinance.) Theresult is that the consumer benefits (and thus the increase in aggregate demand throughthat channel) have been less than had been touted. Critics suggest that, like so many ofthe Feds programs, the real beneficiaries are the banks, especially the large banks thatcontrol the lions share of the mortgage market. If that is the case, the short run benefit tothe economy, at least through this channel, will be limited. 80 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Another market imperfection may have reduced the benefits derived from QEIII evenmore. Mortgages that could easily be refinanced have already been refinanced; borrowerswho have not have either insufficient income or are "underwater." The mortgage could berefinanced only if there were a principal write down. In a standard model with rationality,it would pay both lenders and borrowers to engage in debt restructuring. Foreclosures areexpensive for everyone involved, including the communities in which they occur. There isenormous dead weight loss. But principal write downs entail a recognition of losses fasterthan would otherwise be the case, especially since the change in accounting regulationsin 2009 that allowed even impaired mortgages not to be written down. That would makethe seeming profits in the short run lower, even if it would make long run profits higher.But agency problems pervade the banking system, and bank management has incentivesto focus on the short run. Moreover, some banks may face high costs in raising funds (anatural capital market constraint, arising in part from the high level of non-transparencyof the banks.)In short, the level of refinancing may be far smaller than would be the case if financialmarkets were perfect, but analyzing the extent to which there will be refinancing, and theimpact on banks and aggregate demand, entails a complex analysis of institutionalconstraints and imperfections. Monetary policy ignores these at its peril.BalancingHere, I do not wish to argue for the quantitative importance of any of the effects that Ihave described. What I do contend is that once one moves away from the "perfectmarkets" model, or the "almost perfect markets model" in which we know that monetarypolicy should have no (or negligible) effects, we have to be careful in thinking through thesource of "imperfections" and their consequences.Too much reasoning on the impacts of monetary policy interventions has been based onan almost incoherent pastiche of analyses based on "rationality," "rational expectations,"and "well functioning markets" overlaying a variety of forms of imprecisely specified andexplained market imperfections. Ive alluded to some examples already : while there isample discussion of markets "discounting" future actions, temporary measures, it is stillbelieved, can have significant effects.Some of the disappointments with QEII and QEIII would not have come as a surprise, ifmonetary authorities had grasped better the nature of market imperfections as theyexisted at the time of the implementation of these policies. Given the role that local(community) and regional banks play in the provision of credit to SMEs, given theweaknesses that persist in these banks, given the role that collateral plays for suchlending, given that real estate is the predominant form of collateral, and given that realestate prices remain persistently and markedly below the level before the crisis, it shouldbe no surprise that QE would have limited effects on SME lending. Given that large firmswere sitting on large amounts of cash, it should be no surprise that QE might have littleeffect on lending to large firms and / or investment by these firms.It is at least conceivable in a situation where there is excess capacity in industry and realestate and excess leverage in households, that the adverse effects of QE described earlier(including the adverse consumption effect among the elderly) could outweigh anyinducement towards more investment or consumption among firms or households, andso lowering interest rates could have an adverse affect on aggregate demand. 81 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The realization that it is partly because of--and in some cases mainly because of--marketimperfections that monetary policy has the effects it does (or does not have the effects itis supposed to have) complicates monetary policy in many ways.It means that the simplistic notion, current in recent years, that all one needs to focus onis the real interest rate is simply wrong--even if one could figure out which real interestrate one should focus on.It implies too that the current fad to suggest that the reason that monetary policy isineffective today is the zero lower bound is misguided. We are not in a Keynesian liquiditytrap.It implies too that the effectiveness of monetary policy can be increased if monetaryauthorities work on increasing the effectiveness of the credit channel--strengthening thebanks that are responsible, for instance, for SME lending and eliminating blockages in themortgage market.These insights help us understand why QE II and QE III have not been effective--and arenot likely to be.12. Access to creditThese experiences also highlight a point which is especially important in developingcountries : lower T-bill rates do not necessarily translate into more access to credit. Accessto credit for SMEs is especially important for growth; and private financial systems, ontheir own, may not provide adequate access. (Emran and Stiglitz provide a partialexplanation for why this is so : it is difficult to ascertain who will be good entrepreneurs,and repay their loans; those who prove themselves good get poached away by others. It isthus difficult for those providing capital to appropriate the full value of the informationassociated with their lending activities. )Governments and central banks need to have explicit programs to encourage lending tocertain groups / sectors that are underserved.This may entail partial government guarantees and direct government lending programsand specialized institutions (like development banks) as well as regulatory interventions(like CRA lending requirements in the United States and geographical requirements.)It is important that such requirements be imposed not only on domestic institutions butalso on foreign banks.13. International financeGlobalization has changed the way that monetary policy operates, and its effectiveness.Capital and financial market liberalization was supposed to help stabilize financialmarkets, but the evidence is to the contrary : it has brought new and higher levels ofinstability, without bringing the promised growth.Even the IMF, long the champion of capital market liberalization, has suggested thatcapital account interventions may be desirable.These changes in view are not a surprise. Liberalization / globalization played a centralrole in the rapid movement of the 2008 crisis from the United States around the world.The world of liberalization has been one marked by far higher levels of volatility--and inthe advanced countries far lower rates of growth--than the era before liberalization.Closer studies of financial market liberalization have shown that the flow of funds toSMEs is often reduced, with consequent adverse effects on economic growth.QEII too has heightened these concerns. In a world of globalization, money goes where thereturns are highest--and not necessarily to the country increasing liquidity. Thus, someargue that the major impact of the increased liquidity by the Fed has been to increase 82 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013demand in emerging markets (and perhaps to support asset price increases globally); andin response to the overheating to which it has contributed in the emerging markets, thecentral banks there have tried to undo the effects of what they view as the US competitivedevaluation and have constructed impediments to the free flow of capital. In effect, theyhave tried to offset, in their country, the expansionary effect of US Fed policy. In short,money has been going where its not needed, and not going where its needed. Whyshould an investor with access to funds invest them in the United States or Europe, wherethere is excess capacity and a long term slump, rather than in the high return boomingemerging markets? In the older, closed economy models, they had no choice : but in aglobalized world with free capital markets, they do. From a global point of view, one needsto ask : of what value is there for the Fed to increase liquidity, which then moves to otherparts of the world, and the Central Banks in these countries then take largely offsettingactions?(One of the effects of that policy that may have increased US aggregate demand is alowering of its exchange rate. But this attempt at competitive devaluation is a beggar-thy-neighbor policy, one to which emerging markets have rightly responded, suggesting thatthe US policy of quantitative easing has let loose a "currency war.")Advances in economic theory have helped us to understand what was wrong with earliermodels, which assumed that risk diversification associated with liberalization wouldobviously enhance stability and efficiency; and why the promised gains have not beenmaterialized. The standard models made strong assumptions not only about perfectmarkets (including the absence of information imperfections and asymmetries) but alsoabout the absence of non-convexities, so essentially by assumption, risk diversificationworked. But as I showed in some recent papers, in the presence of such non-convexities,financial market integration may increase risk. A host of papers have now shown thatgreater interlinkages (among financial institutions, across countries) may lead to a greaterrisk of systemic failure.Advances in economic theory have also highlighted some of the reasons that foreignbanks are different from domestic banks : their risk profile is different, and they facegreater asymmetries of information (e.g. about which small firms are likely to be good).Imperfections and asymmetries of information help also explain the high level of volatilityassociated with foreign capital flows.There is now an emerging consensus among economists on several aspects of policyconcerning cross border capital flows :a. Just as there is a need for financial sector regulation, there is a need for regulation ofcross-border flows-countries should be cautious both about capital and financial marketliberalization.b. Cross-border flows and foreign banks behave differently in important respects fromdomestic sources of funds and domestic banks, and therefore there is a need for adifferent regulatory regime. Of course, foreign financial institutions will oppose theseregulations.c. Of particular concern is that many international agreements, signed in the hey-day ofneoliberalism, restrict the ability of governments to impose adequate regulatory regimes,and these need to be changed.d. There is a need for closer cooperation among monetary authorities around the world,and 83 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013e. Larger central banks, the Fed and ECB in particular, need to recognize that they canimpose large externalities on other countries; by contrast, the externalities imposed byany small country are limited.14. Institutional design : The failure of independent central banksModern development economics has stressed the importance of good institutions. Beforethe crisis, American financial institutions and American regulatory institutions (includingthe Fed) were often held up as models for others to imitate. The crisis has not onlyundermined confidence in these institutions, but has also exposed deep institutionalflaws. It has shown that one of the central principles advocated by Western centralbankers-the desirability of central bank independence- was questionable at best. In thecrisis, countries with less independent central banks-China, India, and Brazil-did far, farbetter than countries with more independent central banks, Europe and the UnitedStates. Elsewhere I have provided part of the explanation. There is no such thing as trulyindependent institutions. All public institutions are accountable, and the only question isto whom. Americas central bank was captured by Wall Street : it came to reflect theideology and interests of the financial sector, which it was supposed to regulate. As wesaw earlier in this lecture, it glossed over central issues like externalities and agencyproblems, as it came to believe in self-regulation. The pervasive conflicts of interest--withthe New York Fed President being at the center of bailouts of the very banks that hadplayed a role in his appointment--were a model of bad governance. The Fed had allowedthe development of a financial structure that was rife with conflicts of interests, and hadturned a blind eye to practices that not only exploited the poor, but put into jeopardy theAmerican and global financial system.The notion of the desirability of an independent central bank was predicated on the beliefthat monetary policy was a technocratic matter, with no distributional consequences.There was a single policy that was best for all-a view to which the simplistic models thatthe central banks employed may have contributed, but which was not supported by moregeneral models. There does not, in general, exist a Pareto superior monetary policy.That in turn implies that delegating the conduct of monetary policy and regulations tothose who come from and reflect the interests of the financial market is going to result inpolicies that are not necessarily (and werent) in societys broader interests.Even if one wanted independence, one could have combined independence with broaderrepresentativeness--making sure that consumers who were hurt by banks predatory andexploitive behavior, merchants who were hurt by banks anti-competitive behavior, orworkers who were hurt by higher levels of unemployment--had a greater voice in theconduct of monetary policy and regulation.The crisis has called into question the notion of independence on other grounds :monetary authorities have been engaged in quasi-fiscal operations, giving away tens ofbillions of dollars, in ways that are non-transparent, and often seem capricious. The Fedsaved some banks, throwing tens of billions of dollars at them, but let other banks go. Itsaved some bondholders, but not others. The loans by the Fed and ECB to banks at lowinterest rates--which they could then use to buy higher yielding bonds--was, in effect, agift worth tens of billions of dollars, a gift from the public, but which circumvented theusual public appropriations process. It is unconscionable that such power over the pursebe given to a non-elected body.Monetary authorities need to be held more accountable, especially when they areengaged in policies with strong distributive consequences and which are quasi-fiscal in 84 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013nature. Monetary institutions need to be designed to ensure that they are more reflectiveof societal interests.Concluding CommentsSome years ago, in joint work with my colleague Bruce Greenwald, we provided a critiqueof traditional models in which the effects of monetary policy are mediated just throughinterest rates, and interest rates reflect the balancing of the demand and supply ofmoney. We pointed out that with most "money" being interest bearing, the traditionalview that the interest rate is the opportunity cost of holding money is just wrong;furthermore, most transactions are not income generating, but rather the exchange ofassets, so even if money were required for transactions, there would still be no simple andstable relationship between money and the level of economic activity (since the ratio ofasset transactions to income can be highly variable.) Further, most transactions do notrequire money; credit is typically an effective substitute, and when it is not, one needs toexplain why not.Over the past thirty years, macroeconomics has made a valiant struggle to place itself onfirm micro-foundations, but it chose the wrong micro-foundations-that based on theperfects markets models that were just then becoming discredited, as the economcsprofession gained deeper insights into the related effects of transactions costs,imperfections of competition, absence of risk markets, and imperfections andasymmetries of information. Most disappointing, the standard models for the most partdidnt even provide structural foundations for the financial sector. (And when theyattempted to do so, it was as a result of peculiar and unconvincing assumptions. Forinstance, cash-in-advance models simply assume that credot is not an effective substitutefor cash.)In the 1930s there was an active debate between two approaches to the determination ofthe interest rate, the Keynesian approach, based on the demand for money used fortransactions purposes, and that of Robertson, based on the demand and supply ofloanable funds. In some ways, our approach represents a further development of the workof Robertson, with two important changes.First, in his model, the supply of loanable funds was based just on savings. In ours, there isa critical role for banks, who make assessments of the credit worthiness of potentialborrowers. Imperfect and asymmetric information is central. (Such information tends tobe local and specialized; foreign lenders (suppliers) of funds have different informationthan domestic lenders, so that their allocation of funds is markedly different. This is one ofthe reasons that there is a need for special regulation of cross-border capital flows andforeign banks.)Secondly, in both Keynes and Robertson, demand always equals supply; yet in modelswith imperfect and asymmetric information, there can exist rationing equilibrium. Indeed,such equilibria are pervasive.Thus, traditional models (of both the Keynesian and Robertsonian version) have little tosay about the determination either of credit availability or of the spread, the differencebetween the T-bill rate and the lending rate. If there is a difference, it only reflects adifference in (objectively determined) risk. With risk neutral lenders, the expectedpayments are the same. In the absence of a theory of credit rationing, it is hard to explaina liquidity crisis-and without a theory of liquidity (credit availability) it is hard to knowhow to respond to a liquidity crisis. 85 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013In the Greenwald-Stiglitz models, monetary policy is largely mediated through thebanking system. The lowering of interest rates may (or may not) be reflected in acommensurate lowering of lending rates or a commensurate increase in credit availability.Indeed, there is a new version of a liquidity trap-not caused (as Keynes suggested) by ahigh elasticity of the demand for money, but by a low responsiveness of bank lending,even as the central bank provides the banking sector with more liquidity. This is preciselywhat has been happening in the United States and Europe; and the theory developed byGreenwald and Stiglitz anticipated and predicted this kind of liquidity trap well before itbecame evidenced in the aftermath of this crisis.Keynesian models of monetary economics came into fashion in the last Great Crisis, theGreat Depression. The world has changed much since then; and our understanding ofeconomics too has advanced. And yet, in some circles, we are wedded to ways of thinkingthat have not kept pace. Worse, in the interlude between the Great Depression and theGreat Recession, some were lulled into believing that markets normally worked well; andthe old classical model, slightly modified, came back into fashion. There was, as I havealready noted, an irony in this, for among the advances in economics (game theory andtheories of imperfect and asymmetric information) was an enhanced understanding ofwhat was wrong with that model, and why it provided such a poor description of whatwas going on, both in normal times and even more so in times of crises.These alternative theories provided the foundations of a new theory of financial markets--an understanding of why financial markets are typically not perfectly efficient, and of howimperfect financial markets actually work. The effects of monetary policy are, of course,mediated through financial markets, so this new theory of financial markets is central tomonetary theory. Modern monetary policy has to be based on these foundations.Monetary policy (understood broadly, to include financial regulatory policy) is of suchimportance in part because the financial sector is so important : the financial sector hasbeen likened to the brain of an economy, and if the financial sector does not work well,the economy does not work well. In many countries around the world--including the USand the EU--the financial sector has not done what it should have done and done what itshouldnt have done; the costs of their failures in the US alone amount to trillions ofdollars.In this lecture, I hope I have tried to describe what monetary policy based on a deeperunderstanding of the functioning of financial markets might look like. Most of thepropositions that have been at the center of monetary policy for the past quarter of acentury need to be rethought. Monetary policy has not served our economies andsocieties well. It has arguably contributed to the growing inequality that has marked mostcountries around the world. But of this there can be no doubt : It has not only failed tostabilize the economy in the way that was hoped; but the way that some central bankshave conducted monetary policy and regulation has been at the center of our greatestcrisis in three quarters of a century. This should be the grounds for a revolution inmonetary policy.-------------------------------1 This is lecture is given in Mumbai on January 3, 2012, to commemorate C.D.Deshmukh, who capped his 21 years in the Indian Civil Service with an outstanding stintas Governor of the Reserve Bank of India from 1943-1949. During his tenure, he oversawthe Banks transformation to a nationalized institution, promoted regulation of banks,and established Indias first financial institution for the provision of long-term credit to 86 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013industry. He later served as Union Finance Minister, Indias Special Financial Ambassadorto America and Europe, and among many other notable achievements, made his mark inacademia and public service. It is my honor to give this lecture in recognition of his deepcontributions to India and to his field. Consultative Paper on Review of Corporate Governance Norms in India1.Concept of Corporate Governance1.1."Corporations pool capital from a large investor base both in the domestic and in theinternational capital markets. In this context, investment is ultimately an act of faith inthe ability of a corporations management. When an investor invests money in acorporation, he expects the board and the management to act as trustees and ensure thesafety of the capital and also earn a rate of return that is higher than the cost of capital. Inthis regard, investors expect management to act in their best interests at all times andadopt good corporate governance practices.1.2.Corporate governance is the acceptance by management of the inalienable rights ofshareholders as the true owners of the corporation and of their own role as trustees onbehalf of the shareholders. It is about commitment to values, about ethical businessconduct and about making a distinction between personal and corporate funds in themanagement of a company."2.Evolution of Corporate Governance framework in India :2.1.Companies Act, 1956 provides for basic framework for regulation of all the companies.Certain provisions were incorporated in the Act itself to provide for checks and balancesover the powers of Board viz. :P-Loan to directors or relatives or associated entities (need CG permission) (Sec 295)P-Interested contract needs Board resolution and to be entered in register (Sec 297)P-Interested directors not to participate or vote (Sec 300)P-Appointment of director or relatives for office or place of profit needs approval byshareholders. If the remuneration exceeds prescribed limit , CG approval required (Sec314)P-Audit Committee for Public companies having paid-up capital of Rs. 5 Crores (Sec 292A)P-Shareholders holding 10% can appeal to Court in case of oppression or mismanagement(397/398). 87 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20132.2.In Companies Act, 1956, SEBI has been given power only to administer provisionspertaining to issue and transfer of securities and non-payment of dividend.2.3.Apart from the basic provisions of the Companies Act, every listed company needs tocomply with the provisions of the listing agreement as per Section 21 of SecuritiesContract Regulations Act, 1956. Non-compliance with the same, would lead to delistingunder Section 22A or monetary penalties under Section 23 E of the said Act.2.4.Further, SEBI is empowered under Section 11 and Section 11A of SEBI Act to prescribeconditions for listing. However, Section 32 of the SEBI Act, 1992 states that the provisionsof the SEBI Act, 1992 shall be in addition to, and not in derogation of, the provisions of anyother law for the time being in force.2.5.Considering the emergence of code of best Corporate Governance practices all overthe world (like Cadbury Greenbury and Hampel Committee reports), in 1999, SEBIconstituted a Committee on Corporate Governance under the Chairmanship of ShriKumar Mangalam Birla, to promote and raise the standard of Corporate Governance inrespect of listed companies. SEBIs Board, in its meeting held on January 25, 2000,considered the recommendations of the Committee and decided to make theamendments to the listing agreement on February 21, 2000 for incorporating therecommendations of the committee by inserting a new clause in the Equity ListingAgreement - i.e. Clause 49.2.6.Subsequently, after Enron, WorldCom, and other corporate governance catastrophes,SEBI felt that there was a need to improve further the level of corporate governancestandards in India and constituted a second corporate governance committee chaired byMr. Narayana Murthy, of Infosys Technologies Limited. Based on the recommendations ofthe aforesaid Committee, SEBI issued a circular on August 26, 2003 revising Clause 49 ofthe Listing Agreement. Based on the public comments received thereon and the revisedrecommendations of the Committee, certain provisions of the regulatory framework forcorporate governance were modified and relevant amendments were made to Clause 49of the Listing Agreement. The revised clause 49 superseded all the earlier circulars on thesubject and became effective for listed companies from January 01, 2006. It is applicableto the entities seeking listing for the first time and for existing listed entities having a paidup share capital of Rs. 3 crores and above or net worth of Rs. 25 crores or more at any timein the history of the company.3.Clause 49 :3.1.Clause 49 of the Equity Listing Agreement consists of mandatory as well asnonmandatory provisions. Those which are absolutely essential for corporate governancecan be defined with precision and which can be enforced without any legislativeamendments are classified as mandatory. Others, which are either desirable or which mayrequire change of laws are classified as non-mandatory. The non-mandatory requirementsmay be implemented at the discretion of the company. However, the disclosures of thecompliance with mandatory requirements and adoption (and compliance) / non-adoption 88 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013of the non-mandatory requirements shall be made in the section on corporate governanceof the Annual Report.3.2.Gist of Cause 49 is as follows :*Mandatory provisions comprises of the following :-Composition of Board and its procedure - frequency of meeting, number of independentdirectors, code of conduct for Board of directors and senior management;-Audit Committee, its composition, and role-Provision relating to Subsidiary Companies-Disclosure to Audit committee, Board and the Shareholders-CEO / CFO certification-Quarterly report on corporate governance-Annual compliance certificate*Non-mandatory provisions consist of the following :-Constitution of Remuneration Committee-Despatch of Half-yearly results-Training of Board members-Peer evaluation of Board members-Whistle Blower policy3.3.As per Clause 49 of the Listing Agreement, there should be a separate section onCorporate Governance in the Annual Reports of listed companies, with detailedcompliance report on Corporate Governance. The companies should also submit aquarterly compliance report to the stock exchanges within 15 days from the close ofquarter as per the prescribed format. The report shall be signed either by the ComplianceOfficer or the Chief Executive Officer of the company.4.Apart from Clause 49 of the Equity Listing Agreement, there are certain other clauses inthe listing agreement, which are protecting the minority share holders and ensuringproper disclosures-Disclosure of Shareholding Pattern-Maintenance of minimum public shareholding (25%)-Disclosure and publication of periodical results-Disclosure of Price Sensitive Information-Disclosure and open offer requirements under SAST5.OECD Principles on Corporate Governance :5.1.OECD, in its endeavour to improve the governance practices, had published its revisedprinciples on Corporate Governance in 2002. The OECD Principles of CorporateGovernance have since become an international benchmark for policy makers, investors,corporations and other stakeholders worldwide. They have advanced the corporate 89 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013governance agenda and provided specific guidance for legislative and regulatoryinitiatives in both member and non-member countries. The Financial Stability Forum hasdesignated the Principles as one of the 12 key standards for sound financial systems.5.2.OECD Principles on Corporate Governance are as follows :i.Principle I : Ensuring the Basis for an Effective Corporate Governance FrameworkThe corporate governance framework>should promote transparent and efficient markets,>be consistent with the rule of law and>clearly articulate the division of responsibilities among different supervisory, regulatoryand enforcement authoritiesii.Principle II : The Rights of Shareholders and Key Ownership Functionsprotected andfacilitated>protect and facilitate the exercise of shareholders rightsiii.Principle III : The Equitable Treatment of Shareholders>Should ensure the equitable treatment of all shareholders>opportunity to obtain effective redress for violation of their rightsiv.Principle IV : The Role of Stakeholders in Corporate Governance- recognized>should recognise the rights of stakeholders>encourage co-operation between corporations and stakeholders in creating wealth, jobs,and the sustainability of enterprisesv.Principle V : Disclosure and Transparency>Timely and accurate disclosure is made on all material matters including the financialsituation, performance, ownership, and governance of the company.vi.Principle VI : The Responsibilities of the Board-Monitoring Management andAccountability to Shareholders>should ensure the strategic guidance of the company,>the effective monitoring of management by the board, and>the boards accountability to the company and the shareholders5.3.Indian Corporate Governance Framework is in compliance with the CorporateGovernance principles of OECD. 90 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20135.4.OECD steering committee on corporate governance reviews the principles and itscompliance by member and non-member countries by conducting regular thematic peerreview of member and non-member countries.5.5.SEBI has been actively participating in the OECD Asian Roundtable Conferences and inCorporate Governance Committee and sub-committee meetings as observers. SEBI andOECD have entered into bi-lateral co-operation agreement in the area of CorporateGovernance. In the Third Thematic Peer Review Exercise of OECD on "Minority Protection-Related Party Transactions", India was one of the five jurisdictions (Belgium, France, India,Israel and Italy) that were subject to the in-depth review.5.6.As a part of ongoing bi-lateral policy dialogue between SEBI and OECD, a PolicyDialogue on "Minority Protection- Related Party Transactions" was held on December 14-15, 2011 at SEBI Bhavan. Apart from Representatives of SEBI, MCA, Stock Exchanges,Professional Bodies and Industry Experts, OECD representatives, participants fromregulatory authorities in Israel and Italy participated in the said meeting. Based on thediscussions and suggestions came up in the meeting, certain actions points wereidentified and processed upon.6.Recent policy steps taken by SEBI for ensuring better governance in listedcompanies :The introspection that followed the Satyam episode has resulted in some major changesin Indian corporate governance regime. Some of the recent steps taken in this regard areas follows :6.1.Disclosure of pledged shares : It is made mandatory on the part of promoters(including promoter group) to disclose the details of pledge of shares held by them inlisted entities promoted by them. Further, it was decided to make such disclosures bothevent-based and periodic.6.2.Peer review : In the light of developments with respect to Satyam SEBI carried out apeer review exercise of the working papers (relating to financial statements of listedentities) of auditors in respect of the companies constituting the NSE - Nifty 50, the BSESensex and some listed companies outside the Sensex and Nifty chosen on a randombasis.6.3.Disclosures regarding agreements with the media companies : In order to ensurepublic dissemination of details of agreements entered into by corporates with mediacompanies, the listed entities are required to disclose details of such agreements on theirwebsites and also notify the stock exchange of the same for public dissemination.6.4.Maintenance of website : In order to ensure / enhance public dissemination of allbasic information about the listed entity, listed entities are mandated to maintain afunctional website that contains certain basic information about them, duly updated forall statutory filings, including agreements entered into with media companies, if any. 91 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20136.5.Compulsory dematerialization of Promoter holdings : In order to improvetransparency in the dealings of shares by promoters including pledge / usage as collateral,it is decided that the securities of companies shall be traded in the normal segment of theexchange if and only if, the company has achieved 100% of promoters and promotergroups shareholding in dematerialized form. In all cases, wherein the companies do notsatisfy the above criteria, the trading in securities of such companies shall take place intrade for trade segment;6.6.Peer reviewed Auditor : It has been decided that in respect of all listed entities,limited review / statutory audit reports submitted to the concerned stock exchanges shallbe given only by those auditors who have subjected themselves to the peer review processof ICAI and who hold a valid certificate issued by the Peer Review Board of the saidInstitute;6.7.Approval of appointment of CFO by the Audit Committee : In order to ensure that theCFO has adequate accounting and financial management expertise to review and certifythe financial statements, it is mandated that the appointment of the CFO shall beapproved by the Audit Committee before finalization of the same by the management.The Audit Committee, while approving the appointment, shall assess the qualifications,experience & background etc. of the candidate6.8.Disclosure of voting results : In order to ensure wider dissemination of informationregarding voting patterns which gives a better picture of how the meetings are conductedand how the different categories of investors have voted on a resolution, listed entities arerequired to disclose the voting results / patterns on their websites and to the exchangeswithin 48 hours from the conclusion of the concerned shareholders meeting.6.9.Enabling shareholders to electronically cast their vote : In order to enable widerparticipation of shareholders in important proposals, listed companies are mandated toenable e-voting facility also to their shareholders, in respect of those businesses which aretransacted through postal ballot by the listed companies.6.10.Manner of dealing audit reports filed by listed entities : SEBI board has approved amechanism to process qualified annual audit reports filed by the listed entities with stockexchanges and Annual Audit Reports where accounting irregularities have been pointedout by Financial Reporting Review Board of the Institute of Chartered Accountants of India(ICAI-FRRB). In order to enhance the quality of financial reporting done by listed entities, ithas been, inter-alia, decided that :>Deficiencies in the present process would be examined and rectified.>SEBI would create Qualified Audit Report review Committee (QARC) represented by ICAI,Stock Exchanges, etc. to guide SEBI in processing audit reports where auditors have givenqualified audit reports.>Listed entities would be required to file annual audit reports to the stock exchangesalongwith the applicable Forms (Form A : Unqualified / Matter of Emphasis Report;Form B : Qualified / Subject To / Except For Audit Report). 92 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013>After preliminary scrutiny and based on materiality, exchanges would refer these reportsto SEBI / QARC>Cases wherein the qualifications are significant and explanation given by Company isunsatisfactory would be referred to the ICAI-FRRB. If ICAI-FRRB opines that thequalification is justified, SEBI may mandate a restatement of the accounts of the entityand require the entity to inform the same to the shareholders by making theannouncement to stock exchanges.6.11.Recently, NSE held a conference jointly with SEBI and CFA Institute on "IndependentDirectors - issues and Challenges" - to create awareness among independent Directors;7.Companies Bill, 2012 :7.1.It may be noted that the Companies Bill, 2012 is passed by Lok Sabha. Though SEBIsuggested that SEBI may be given jurisdiction to prescribe matters relating to corporategovernance for listed companies, it was decided by Ministry of Corporate Affairs that coregoverning principles of corporate governance may be provided in the bill itself. Thus, inthe Companies Bill 2012, various new provisions have been included (which are notprovided for in Companies Act, 1956) for better governance of the companies. Some ofthose new provisions are :*Requirement to constitute Remuneration and nomination committee and StakeholdersGrievances Committee*Granting of More powers to Audit Committee*Specific clause pertaining to duties of directors*Mode of appointment of Independent Directors and their tenure*Code of Conduct for Independent Directors*Rotation of Auditors and restriction on Auditors for providing non-audit services*Enhancement of liability of Auditors*Disclosure and approval of RPTs*Mandatory Auditing Standards*Enabling Shareholders Associations / Group of Shareholders for taking class action suitsand reimbursement of the expenses out of Investor Education and Protection Fund*Constitution of National Financial Reporting Authority, an independent body to takeaction against the Auditors in case of professional mis-conduct*Requirement to spend on CSR activities7.2.The Companies Bill contains detailed provisions pertaining to corporate governance.Once the bill is enacted, the entire clause 49 may be revisited to make it consistent withthe Companies Act. However, SEBI can impose more stringent conditions to the listedcompanies through listing agreement, than those proposed in the Companies Bill,considering the need to have better governance practices in the listed companies,provided those provisions are not derogatory to the provisions of the enactment.8.Policy document on Corporate Governance :8.1.In December 2009, Ministry of Corporate Affairs specified Voluntary Guidelines onCorporate Governance. These guidelines provide for a set of good practices, which will 93 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013help the companies to strengthen their internal governance processes and may bevoluntarily adopted by the Indian Public companies8.2. In March 2012, Ministry of Corporate Affairs constituted a committee under theChairmanship of Mr. Adi Godrej, Chairman, Godrej Industries Limited, to formulate policydocument on Corporate Governance. In September, 2012 the Committee submitted itsdocument, specifying seventeen guiding principles on corporate governance.9.The purpose and scope of the concept paper :9.1.SEBI is of the view that any code of Corporate Governance must be dynamic, evolvingand should change with changing context and times. SEBI, time to time, is in receipt of thesuggestions and clarifications from the industries to review the corporate governancecode. To keep pace with the changing expectations of the investors, shareholders, andother stakeholders, all such suggestions received are placed before the Primary MarketAdvisory Committee (PMAC) or SEBI Committee on Disclosure and Accounting Standards(SCODA). Subsequently, these suggestions are taken to SEBI Board and necessaryamendments are carried out to extant regulations / Listing Agreement.9.2.Though the good practices prevailing in other jurisdictions and recent reports of OECDand other international bodies have been referred to in framing this concept paper, onlythose proposals, which would be relevant to India, considering the uniqueness ofshareholding pattern of Indian listed companies and which are consistent with theexisting framework have been dealt upon.9.3.Presently, it is felt that the existing clause 49 may be revisited in the view of change inscenarios subsequent to the framing of the code in 2004. The intention of reviewing theClause 49 is not to add on to another code of compliance, but to compare the variousexisting best practices and to make our framework more effective. All the proposalsmentioned in Companies Bill, 2012, MCA Voluntary Guidelines, 2009 and the MCA -Guiding principles of corporate governance have been perused and necessary referencehas been made in the concept paper at relevant places, so that there is no variation withthe guiding principles prescribed by MCA . Pending enactment of the Companies Bill, SEBImay prescribe these conditions detailing the governance conditions of the listedcompanies, which are mostly in line with the principles and text of the provisions ofCompanies Bill, 2012. In case of variations, the clause 49 will be revisited on enactment ofCompanies Bill, 2012.9.4.The objective of the concept paper is to entice a wider debate on the governancerequirement for the listed companies so as to adopt better global practices. While it needsto be ensured that the proposals suggested would not result in increasing the additionalcost of compliances by huge margin and that the cost should not outweigh the benefit oflisting, at the same time, it is necessary to bring back the confidence of the investors backto the capital market, for channelizing savings into investment, which is the need of thehour. 94 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20139.5.Though some of these proposals are already provided for in the Companies Bill, 2012and the Companies Bill is waiting parliamentary nod, it is proposed to advance theimplementation of these proposals to listed companies to make them acclimatize to theseprovisions.9.6.Considering the need to revise existing clause 49 on enactment of the Companies Bill,2012, the changes needed in Clause 49 are also considered.9.7.Following additional proposals may be examined to improve the governance level ofcompanies in India.10.Overarching principles of Corporate Governance10.1.While some countries, including the UK and many Commonwealth countries,adopted what became known as a principles-based or comply or explain approach to theenforcement of the provisions of corporate governance codes, in US, provisions ofSarbanes Oxley and other statutes follow a rule based approach. In India, clause 49 is ahybrid approach, as those requirements which can be enforced are classified asmandatory and others, which are desirable, are classified as non-mandatory. Thedisclosures of the compliance with mandatory requirements and adoption (andcompliance) / non-adoption of the non-mandatory requirements shall be made in thesection on corporate governance in the Annual Report.10.2.It is felt that rule based approach alone may not serve the purpose of improving theCorporate Governance of listed companies. A hybrid approach, wherein the broadprinciples are laid down to give broad direction to the companies on CorporateGovernance and what is expected of them followed by rules to mandate compliance withspecific aspects of Corporate Governance would be considered as the most effectivemechanism for improving Corporate Governance in the Indian scenario.10.3.In this context, it may be noted that OECD has prescribed Six major principles ofCorporate Governance which have already been discussed in Para 5. Further, as referred toin Para 8, a Committee constituted by MCA under the Chairmanship of Shri. Adi Godrejhas also specified seventeen guiding principles of Corporate Governance. Broadly, theregulatory framework in India is almost in compliance with the said OECD Principles andthe seventeen guiding principles, barring a few, which are also sought to be addressed inthis concept paper.10.4.Accordingly, it is proposed to explicitly specify the principles of Corporate Governancein the listing agreement, which are broadly based on the OECD Principles of CorporateGovernance and the guiding principles of Corporate Governance specified by Adi GodrejCommittee :i.The company should seek to protect and facilitate the exercise of shareholders rightsii.The company should ensure the equitable treatment of all shareholders 95 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013iii.The Company should frame its policies / procedures to facilitate shareholders to obtaineffective redress for violation of their rights.iv.The company should recognise the rights of stakeholders in Corporate Governance andencourage co-operation between company and stakeholders.v.The company should ensure timely and accurate disclosure on all material mattersincluding the financial situation, performance, ownership, and governance of thecompany.vi.The company should strive to bring in diversity of thought, experience, knowledge,understanding, perspective, gender and age in the Board.vii.The company should have an induction / on-boarding program which should alsoaddress the unique legal and regulatory compliance issues facing the company and itsindustry.viii.The company should appoint an Independent Director as a Lead Director who shallchair the meetings of Independent Directors and act as a liaison between IndependentDirectors and Management / Board / Shareholder.ix.The company should facilitate and encourage direct conversations between theindependent directors, and one-on-one meetings between a committee of independentdirectors with the auditors.x.The company shall maintain minutes of the meetings which should explicitly recorddissenting opinions, if any.xi.The company should encourage continuing Board training and education to ensure thatthe Board members are kept up to date.xii.The Company should frame, monitor and review a Board Evaluation framework anddisclose the same to shareholders periodically.xiii.The Company should formulate and implement an effective whistleblowermechanism and disclose the same.xiv.The Board should provide the strategic guidance to the company, ensure effectivemonitoring of the management and should be accountable to the company and theshareholders.xv.The Board should set a corporate culture and the values by which executivesthroughout a group will behave.xvi.The Board should have ability to step back to assist executive management bychallenging the assumptions underlying : strategy, strategic initiatives (such asacquisitions), risk appetite, exposures and the key areas of the companys focus; 96 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013xvii.The Board should ensure that, while rightly encouraging positive thinking, these donot result in over-optimism that either leads to significant risks not being recognised orexposes the company to excessive risk;xviii.The Board should satisfy and balance the interests of a wider set of stakeholders andshould try to balance performance with compliance.xix.The Board Chair, CEO and the rest of the board should work cohesively to identify as towhat is the right mix of skills that is required for selecting the senior management.xx.Senior Management must place the relevant information immediately / periodicallybefore the board and shall also send the Board Agendas in advance so as to enable theBoard to make well informed decision.xxi.The Board and top management should conduct themselves so as to meet theexpectations of operational transparency to stakeholders while at the same timemaintaining confidentiality of information in order to foster a culture for good decision-making.xxii.Board of a listed company should ensure that plans are in place for the orderlysuccession for appointments to the board and senior management.xxiii.The board should eliminate policies that promote excessive risk-taking for the sake ofshort-term increases in stock price performance and ensure that a risk / crisismanagement plan is in place.xxiv.All the directors of the company (including independent directors) shall exercise theirduties with due and reasonable care, skill and diligence;xxv.Incentives to the top management should be based on remuneration that aligns withthe long term interest of the companyxxvi.Executive directors and senior management should provide all the facilities for theindependent directors to perform the role in a better manner as a Board member and alsoa member of a committee;These principles will have overriding effect over the specific rules laid down in the listingagreement. All listed companies would be required to follow the above principles in thegovernance of the company.11.Proposals :11.1.Appointment of independent directors by minority shareholdersThere is a need to adopt a more professional, independent and transparent approach forappointing independent directors. Presently, the appointment / removal of independentdirectors is done through election by majority. As such, they occupy their position at the 97 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013pleasure of the controlling shareholders and may therefore be prone to act in accordancewith the will of the major shareholders. This, in effect, may hinder their "independence"and may limit their efficacy, which would defeat the purpose of appointment ofindependent directors.Companies Bill, 2012 provides for the manner of selection of Independent Directors froma data bank maintained by anybody, institute or association notified by the CentralGovernment. As per the Companies Bill, an independent director may be selected from adatabank containing names, addresses and qualifications of persons who are eligible andwilling to act as independent directors. Responsibility of exercising due diligence beforeselecting a person from the data bank shall lie with the company making suchappointment.Some jurisdictions, like Italy, have provisions for appointment of independent directors byminority shareholders. Similarly, in UK, FSA has proposed a dual voting structure wherebyindependent directors of premium listed companies with controlling shareholders mustbe approved both by the shareholders as a whole and the independent shareholders.However, viability of this proposal in Indian context needs to be examined. Therequirement in India is to have one-third or half of the member of the Board asIndependent Directors. In such cases, if all the independent directors are to be appointedby "majority of minority", it may result in "abuse by minority" (a large corporate firm caneasily acquire majority holding among the non-promoter holders, who are normallydispersed and may appoint "its person" to destabilize its rival board).Section 252 of the Companies Act, 1956 enables a public company having paid-up capitalof five crore rupees or more or having one thousand or more small shareholders, to elect adirector elected by such small shareholders. "Small shareholders" has been defined as ashareholder holding shares of nominal value of not more than Rs. 20,000 or such othersum as may be prescribed. Clause 151 of the Companies Bill has similar provision enablinga listed company to elect such small shareholders in such manner and with such termsand conditions as may be prescribed. This provision may be workable in Indian contextand it may be explored as to whether listed companies beyond a market cap need to bemandated to have at least one small shareholder director.11.2.Cumulative voting for appointment of Independent Director :There are suggestions that introduction of cumulative voting or proportionate voting,which is permitted in the Philippines and China, may provide alternatives to the directorselection process and may foster stronger minority shareholder protection in Indias legalframework for corporate governance. Cumulative voting allows shareholders to cast all oftheir votes for a single nominee for the board of directors when the company has multipleopenings on its board. In contrast, in regular voting, shareholders cannot give more thanone vote per share to any single nominee. With cumulative voting, one could choose tovote all available votes for one candidate, split his vote between two candidates, orotherwise divide his votes whichever way he wanted. However, there is no empiricalevidence to state that cumulative voting has resulted in improving the governancepractices. Presently, Companies Act, 1956 enables election of directors through 98 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013cumulative voting. As per the provisions of the Companies Act, the articles of a companymay provide for the appointment of not less than two-thirds of the total number of thedirectors of a public company, according to the principle of proportional representation,whether by the single transferable vote or by a system of cumulative voting or otherwise,the appointments being made once in every three years and interim casual vacanciesbeing filled in accordance with the provisions. Hence, the said option is already providedin the Companies Act / bill and best left to the choice of the company.11.3.Formal letter of appointment :As per voluntary Guidelines issued by MCA, Companies should issue formal letters ofappointment to Non- Executive Directors (NEDs) and Independent Directors - as is done bythem while appointing employees and Executive Directors. The letter should specify :*The term of the appointment;*The expectation of the Board from the appointed director; the Board-level committee(s)in which the director is expected to serve and its tasks;*The fiduciary duties that come with such an appointment along with accompanyingliabilities;*Provision for Directors and Officers (D&O) insurance, if any,;*The Code of Business Ethics that the company expects its directors and employees tofollow;*The list of actions that a director should not do while functioning as such in thecompany; and*The remuneration, including sitting fees and stock options etc, if any.Such formal letter should form part of the disclosure to shareholders at the time of theratification of his / her appointment or re-appointment to the Board. This letter shouldalso be placed by the company on its website, if any, and in case the company is a listedcompany, also on the website of the stock exchange where the securities of the companyare listed.The aforesaid provision is also inserted in the Companies Bill, 2012. It is proposed to alignthe requirements of clause 49 with aforesaid provision.11.4.Certification course and training for independent directorsSEBI has established National Institute of Securities Markets (NISM), a public trust, to addto market quality through educational initiatives. School for Corporate Governance, NISM,jointly works with the Global Corporate Governance Forum of International FinanceCorporation in conducting workshops on various aspects of corporate governance. Apartfrom that NISM is conducting certified course for various market participants. A separatecourse for independent directors may be devised by NISM for independent directorscovering their role, liabilities, expectations from various stake holders, internal controls,risk management systems, business models and independent directors may be mandatedto clear such courses, before their appointment. Apart from conducting induction courses,NISM may also conduct training / review courses for independent directors. 99 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013As per the Guiding principles of Corporate Governance, the companies should ensure thatdirectors are inducted through a suitable familiarization process covering, inter-alia, theirroles, responsibilities and liabilities. Efforts should be made to ensure that every directorhas the ability to understand basic financial statements and related documents / papers.There should be a statement to this effect by the Board in the Annual Report. Besides this,the Board should also adopt suitable methods to enrich the skills of directors from time totime.As part of good governance it is important that the people heading the organisation areup to date with the latest trends in their field. In order to ensure that they are kept up todate, regular training session can be conducted. The training requirements of theindependent directors inducted by the listed companies would vary depending upon theirqualifications, background, familiarity with business models followed by the company, itssize, industry, organizational perspective etc.OECD recommends that efforts by private-sector institutes, organisations andassociations to train directors should be encouraged. Such training should focus on bothdischarge of fiduciary duties and value-enhancing board activities. International technical-assistance organizations should facilitate these efforts as appropriate.There is a non-mandatory provision in Clause 49 of the listing agreement, regardingtraining of Board members stating that the listed company may train its Board membersin the business model as well as the risk profile of the business parameters of thecompany, their responsibilities as directors, and the best ways to discharge them.While the requirement may be retained as non-mandatory, it is proposed to requiredisclosure of the methodology / details of training imparted to Independent Directors inthe Boards Report.11.5.Treatment of nominee director as Non-Independent Director :Presently, explanation to Clause 49 (I) (A) (iii) provides that the nominee directorsappointed by an institution which has invested in or lent to the company shall be deemedto be independent directors. However, it is clarified in the explanatory note that"institution" for the above purpose means only a public financial institution as defined inSection 4A of the Companies Act, 1956 or a "corresponding new bank" as defined insection 2(d) of the Banking Companies (Acquisition and Transfer of Undertakings) Act,1970 or the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.Accordingly, the exemption given to nominee directors shall be applicable only to thenominee directors appointed by the above institutions and other nominee directors willnot be considered independent for the purpose of Clause 49 of the Listing Agreement.It may be stated that the requirement of Independent director has been incorporated inClause 49 of the Listing Agreement so as to bring in an independent judgment on thedeliberations of the board of the company, especially on issues of strategy, performance, 100management of conflicts and standards of conduct. Independent Directors are supposed Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013to serve the interest of the other minority shareholders as well and to act in theparamount interest of the company as a whole. But this principle, may be compromised ifthe director is appointed, under an agreement by a institution or body or by a lender, asprecedence may be given to the interest of the nominating body over the paramountinterest of the company and the expected independence of judgment of the nomineedirector may be lost.With regard to nominee directors, even Narayana Murthy Committee Report, on the basisof which revised clause 49 has been amended, felt that institution of nominee directorsmay create conflict of interest as they may be answerable only to the institutions /organisations they represent and generally, may take no responsibility for the companysmanagement or fiduciary responsibility to other shareholders. It is necessary that alldirectors, whether representing institutions or otherwise, should have the sameresponsibilities and liabilities.The Companies Bill, 2012 defines Independent director as a non-executive director of thecompany, other than a nominee director. Further, the Bill defines "nominee director" as adirector nominated by any financial institution in pursuance of the provisions of any lawfor the time being in force, or of any agreement, or appointed by any Government, or anyother person to represent its interests.Thus, it is proposed to exclude the nominee directors from the category of independentdirectors to align the provisions of Clause 49 with the bill.11.6.Mandate minimum and maximum age for Independent DirectorsThere are no existing norms for independent directors in terms of age. While clause 49 oflisting agreement fixes the minimum age for the ID to be 21 years, the Bill does notprescribes so.As per Schedule XIII of Companies Act, 1956, a managing director or whole time directorshould have completed the age of 25 years and should not have attained the age of 70years. Where he has not completed the age of 25 years, but has attained the age ofmajority or he has attained the age of 70 years, his appointment need to be approved by aspecial resolution passed by the company in general meeting. Otherwise, approval of theCentral Government is required. The requirement of special resolution / CentralGovernment approval is expected to address any concern in this regard. A similarprovision is also incorporated in the Companies Bill.It would be difficult to stipulate maximum age for an independent director since it woulddiffer from company to company based on the line of activities it is engaged in. The Billprescribes maximum age limit for key managerial personnel to retire at age of 70,however for IDs, no retiring age is stipulated.The proposal to have minimum and maximum age for the independent director may beexamined in light of the above. 101 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201311.7.Mandating maximum tenure for independent director :Presently, as per clause 49, Independent Directors may have a tenure not exceeding, in theaggregate, a period of nine years, on the Board of a company. However, this is only a non-mandatory requirement. Over a period of time, an independent director may develop afriendly relationship with the company and the board and may develop a casual approach,which may affect his envisaged role.As per voluntary guidelines issued by MCA, an Individual may not remain as anIndependent Director in a company for more than six years. A period of three years shouldelapse before such an individual is inducted in the same company in any capacity. Noindividual may be allowed to have more than three terms as Independent Director.As per the Companies Bill, Independent Directors shall hold office for a term up to 5consecutive years on the Board of a company, but shall be eligible for re- appointment onpassing of a special resolution by the company and disclosure of such appointment in theBoards report. He shall hold office for not more than two consecutive terms, but suchindependent director shall be eligible for appointment after the expiration of three yearsof ceasing to become an independent director; During the said period of three years, heshall not be appointed in or be associated with the company in any other capacity, eitherdirectly or indirectly.It is proposed to align the requirements with the provisions of Companies Bill.11.8.Requiring Independent directors to disclose reasons of their resignation :As per clause 49, an independent director who resigns or is removed from the Board of theCompany shall be replaced by a new independent director within a period of not morethan 180 days from the day of such resignation or removal, as the case may be. However,there is no provision to disclose the reason of their resignation.Often directors resign from the board, without quoting any reasons. Resignation of non-executive directors might be due to their disagreement with the management in certainmatters. It has been suggested that the reason for the resignation of the independentdirector should be submitted to the Board of the company which in turn should circulatethe same to the shareholders and inform the stock exchange in this regard.It may be noted that the Combined Code on Corporate Governance, UK (June 2008) statesthat "On resignation, a non-executive director should provide a written statement to thechairman, for circulation to the board, if they have any concerns." But the Combined Codeis not mandated, as the "Comply or Explain" principle prevails in UK. However, on the flipside, the proposal to disclose reasons of resignation to the shareholders & stockexchanges would attract speculative media coverage and affect sentiments of thestakeholders. Hence, non-executive directors may be required to submit the reasons forresignation thereof in writing. Letter of resignation may be tabled at the ensuing Boardmeeting and reasons thereof read out. Details of deliberations at the meeting may be 102recorded in the minutes and appropriate disclosures may be made in the Directors Report. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013As per Companies Bill, a director may resign from his office by giving a notice in writing tothe company and the Board shall, on receipt of such notice take note of the same and thecompany shall intimate the Registrar and shall also place the fact of such resignation inthe report of directors laid in the immediately following general meeting by the company.Director shall also forward a copy of his resignation along with detailed reasons for theresignation to the Registrar within thirty days of resignation.It is proposed to align the requirements with the provisions of Companies Bill.It may not avoid some directors quoting "personal reasons", however, atleast there wouldbe requirement to ensure recording of such statement before the board. But anyone whouses the personal reasons excuse may, if have other listed directorships, be required toexplain in the same announcement why these personal reasons do not make it necessaryto resign from those positions, too.11.9.Clarity on liabilities and on remuneration of independent directors :There is need to bring in risk-return parity to the post of "independent directors" to attractquality people into the Board. Presently, there is no clarity on the liability of independentdirectors. The remuneration paid to independent directors (only sitting fees in most cases)is found to be inadequate considering the risk and responsibility associated with the post.Though the Companies Bill states that an independent director shall not be entitled to anystock option, it allows payment of sitting fees, reimbursement of expenses and profitrelated commissions.Since most of the responsibilities for governance are placed on the independent directors,to attract competent persons to the board (to improve their participation in the Board andcommittee meetings), it is reasonable to provide for some minimum monetarycompensation. On one hand the quantum of compensation should not be affect theirindependence and at the same time, it should attract competent persons to occupy theposition in the board. Presently, as per clause 49 independent directors are entitled to getdirectors remuneration (may be a commission on the percentage of net profit, but notmonthly remuneration as it may affect their independence and role) apart from thesitting fees. But, it is important to have a balance of fixed and variable pay and introducean objective process of board evaluation facilitated by external experts.As per clause 49 of corporate governance, "All fees / compensation, if any paid to non-executive directors, including independent directors, shall be fixed by the Board ofDirectors and shall require previous approval of shareholders in general meeting. Theshareholders resolution shall specify the limits for the maximum number of stock optionsthat can be granted to non-executive directors, including independent directors, in anyfinancial year and in aggregate".As per the proposed Companies Bill, independent directors shall not be entitled to anyremuneration, other than sitting fees, reimbursement of expenses for participation in the 103Board and other meetings and profit related commission as may be approved by the Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013members. It is proposed to align the requirements of Clause 49 with the provisions ofCompanies Bill.The Companies Bill 2012 also makes independent director liable, only in respect of suchacts of omission or commission which had occurred with his knowledge, attributablethrough Board processes and with his consent or connivance or where he had not acteddiligently.11.10.Performance evaluation of independent director :Presently, Clause 49 requires that the performance evaluation of non-executive directorsbe done by a peer group comprising the entire Board of Directors, excluding the directorbeing evaluated; and Peer Group evaluation could be the mechanism to determinewhether to extend / continue the terms of appointment of non-executive directors. Butthis is a non-mandatory requirement.The Companies Bill mentions that performance evaluation of independent directors shallbe done by the entire Board of Directors, excluding the director being evaluated. On thebasis of the report of performance evaluation, it shall be determined whether to extend orcontinue the term of appointment of the independent director.It is proposed to mandate the requirement of performance evaluation for Directors and torequire such evaluation report of the independent director should also based on hisattendance and contribution to the board / committee meetings and such appraisal shallbe placed before the nomination committee for taking a decisions for reappointment.11.11.Lead Independent DirectorThe OECD Principles of Corporate Governance (Principle VI (E)) envisages the post of lead-independent director to chair the meetings of outside directors. The UK CorporateGovernance Code provides for the post of Senior Independent Director whose name shallbe disclosed in the Annual Report. The code also provides that the senior independentdirector should be available to shareholders if they have concerns which contact throughthe normal channels of chairman, chief executive or other executive directors has failed toresolve or for which such contact is inappropriate. The 17 guiding principles of Corporategovernance also provides for a Lead Independent Director. These principles envisage thelead director as an independent chief among all board members who assists incoordinating the activities and decisions of the other non-executive and / or independentdirectors and chairs the meetings of Independent Directors. In case the company has anIndependent Chairman, he shall act as the Lead Independent Director. On a flip side, suchproposal may lead to creation of power centre among independent directors, whereasindependent directors are collectively expected to function in tandem in the interest of allthe stakeholders. To avoid the same, the post may be rotated among the independentdirectors every three years. This proposal may be examined in light of the above.11.12.Separate meetings of Independent Directors 104 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Meetings of independent directors in the absence of management / executive directorsprovide an opportunity for the Independent Directors to express their views freely andwithout hesitation and are expected to improve the level of corporate governance to ahigher level. Pursuant to passing of the Sarbanes Oxley Act, the stock exchanges in USamended their listing rules to provide for a compulsory meeting of Independent / Non-management / outside directors separately in the absence of the executive directors. Inthe United States, NASDAQ Listing Rules (Rule 5605 (2)) requires independent directors tohave regularly scheduled meetings at which only independent directors are present, atleast twice a year. Rule 303.A.03 of the NYSE Listing Rules also contains similarrequirement. UK Corporate Governance Code also provides for meetings of the non-executive directors led by the senior independent director at least annually to appraisechairmans performance and on such other occasions as are deemed appropriate. TheCompanies Bill 2012 also provides for separate meetings of Independent Directors at leastonce a year. In these meetings, Independent Directors would be expected to examineinternal controls and general governance practices prevailing in the company and bringout any inefficiency to the attention of shareholders and their report in this regard mayform part of the annual report. Further, such meetings may also review the performanceof the Chairman, non-independent directors and the Board as a whole. It is proposed toamend clause 49 to align it with the requirements of Bill.11.13.Restriction on the number of independent directorshipsIt has been suggested that there should be a cap on the number of independentdirectorships a person can serve, so that he can have necessary time to analyse theagendas of the committee meetings and the board meetings of the company in which heis acting as Independent director and to make effective contributions in this regard.Presently, though there is no restriction on the number of independent directorship. But itis pertinent to note that Section 275 of the Companies Act restricts the number ofdirectorship of a person to fifteen public companies whereas the Companies Bill proposesto restrict the number of directorships of a person to ten public companies.Though the Companies Act puts a ceiling of 15 directorships of public companies, amongpublic companies, listed ones demand a much greater degree of commitment from anIndependent Director, including attending at least four board meetings and severalmeetings of one or more of the many committees during a year.As per the Voluntary Guidelines issued by MCA, the maximum number of publiccompanies in which an individual may serve as an Independent Director should berestricted to seven. It needs to be examined as to whether to restrict number ofindependent directorships.11.14.Separating the position of Chairman and that of the Managing Director / CEOThere are suggestions that the position of Chairman and that of the Managing Director /CEO should be segregated to avoid one person having unfettered powers of management. 105 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013It might be noted that requirement to segregate the role of Chairman and CEO is commonamong the most of the developed jurisdiction like US, UK France etc.As per Voluntary Guidelines issued by MCA, to prevent unfettered decision making powerwith a single individual, there should be a clear demarcation of the roles andresponsibilities of the Chairman of the Board and that of the Managing Director / ChiefExecutive Officer (CEO). The roles and offices of Chairman and CEO should be separated,as far as possible, to promote balance of power.As per, OECD report on "Corporate Governance and the Financial Crisis - Conclusions andemerging good practices to enhance implementation of the Principles", when the roles ofCEO and the Chairman are not separated, it is important in larger, complex companies toexplain the measures that have been taken to avoid conflicts of interest and to ensure theintegrity of the chairman function.As per Companies Bill, 2012, an individual shall not be appointed or reappointed as thechairperson of the company, in pursuance of the articles of the company, as well as themanaging director or Chief Executive Officer of the company at the same time unless,-(a)the articles of such a company provide otherwise; or(b)the company does not carry multiple businessesAs per Clause 49, where the Chairman of the Board is a non-executive director, at leastone-third of the Board should comprise of independent directors and in case he is anexecutive director, at least half of the Board should comprise of independent directors.It is proposed to align the requirements of clause 49 with the Bill.11.15.Board diversityReport of the Committee constituted by MCA to formulate a Policy Document onCorporate Governance mentions the necessity of having more diversified board, whichcontributes to better performance, since in such cases decisions would be based onevaluating more alternatives compared to homogenous boards. Diversity, in all its aspects,serves an important purpose for board effectiveness. It can widen perspectives whilemaking decisions, avoid similarity of attitude and help companies better understand andconnect with their stakeholders. The handful number of woman directors in the board ofIndian listed companies may explain the need for bringing gender diversity in the board.The Companies Bill, 2012 has taken some positive steps in this regard by providing theCentral Government with the power to prescribe rules for providing minimal womensrepresentation on corporate boards in certain classes of companies.Presently, Clause 49 states that the company may ensure that the person who is beingappointed as an independent director has the requisite qualifications and experiencewhich would be of use to the company and which, in the opinion of the company, wouldenable him / her to contribute effectively to the company in his capacity as an 106independent director. Further, it may be examined whether to make the nomination Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013committee responsible for ensuring that persons from divergent background and genderare nominated for maintaining board diversity.11.16.Succession PlanningPrinciple VI (D) (3) of the OECD Principles of Corporate Governance - Responsibilities ofthe Board, requires the Board to oversee succession planning. Globally, the standards onsuccession planning differ in various jurisdictions. In the United States, though successionplanning is not mandated, shareholders can require companies to disclose and even putto vote the succession plan of the listed companies. The UK Corporate Governance Coderecommends that the board should satisfy itself that plans are in place for the orderlysuccession for appointments to the board and to senior management. The GuidingPrinciples of Corporate Governance also lists Succession Planning as one of the guidingprinciples of corporate governance. The best way to ensure that a company does notsuffer due to a sudden unplanned for gap in leadership is to develop an action plan for asuccessful succession transition. Hence, Board of a listed company may be required toensure that plans are in place for the orderly succession for appointments to the boardand senior management. Further, the viability of mandatory disclosure of SuccessionPlanning to Board / Shareholders at periodic intervals may also be examined.11.17.Risk ManagementClause 49(IV)(C) of the Listing Agreement requires the company to lay down procedures toinform Board members about the risk assessment and minimization procedures and toreview them periodically to ensure risk control. OECD Report on "Corporate Governanceand the Financial crisis - Conclusions and emerging good practices" mentions the need tohave an effective risk management as one of the four major findings of the crisis. The 17guiding principles of Corporate governance enlists Risk Management and Crisismanagement as two of the corporate governance principles. The Companies Bill requirescompanies to disclose the development and implementation of risk management policy inthe Boards Report. Further, Clause 177 of the Bill enlists evaluation of risk managementsystem as one of the functions of the Audit Committee. In this regard, it may bedeliberated on whether the risk management be made the ultimate responsibility of theBoard or the responsibility can be delegated to the Risk Management Committee or to theAudit Committee. The feasibility of appointment of Chief Risk Officer / Risk Manager forlarge listed companies may also require consideration. Further, it has to be examined as towhether more specific parameters / requirements such as framing a risk managementplan, its compulsory monitoring and reviewing by a Board / Board Committee and thedisclosure thereof to the shareholders at periodic intervals (preferably on annual basis) belaid down in the Listing Agreement.11.18.Reporting of the internal auditorAudit Committee has been assigned a significant role in the Companies Act, 1956 and inthe listing agreement. Audit Committee is expected to oversee the companys financialreporting process, review periodical and annual financial statements (including RelatedParty transactions) and adequacy of the internal control systems and to review the 107 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013findings by the internal auditors and also the oversight of the companys riskmanagement policies and programs.Appropriate reporting relationships are absolutely critical if internal auditing is to achievethe independence, objectivity, and organizational stature necessary to fulfil its obligationsand mandate to effectively assess internal controls, risk management, and governance. Toachieve necessary independence, best practices suggest that the internal auditor shouldreport directly to the audit committee or its equivalent. For day to day administrativepurposes, the internal auditor should co-ordinate with the senior most executives (i.e. CEO/ CFO) of the organization. This suggestion needs to be deliberated upon.11.19.Mandatory rotation of audit partnersThe quality of financials reported by companies and the true and fair view of the financialstatements submitted by listed entities to the stock exchanges have, of late, come intosharp focus, after the Satyam episode. SEBI has recently taken various steps in this regardto repose the faith in the audit done by listed companies*by mandating compliance with accounting standards,*by doing peer review audit of Sensex and Nifty Companies,*by mandating the appointment of peer reviewed auditor for listed companies andcompanies proposing to list,*by constituting a Forensic Accounting Cell,*by mandating re-statement of accounts, by taking action against auditors etc.In this context, it was felt relevant to discuss the need for independence of the statutoryauditors with respect to the listed entity. A longer association between a particular auditfirm and a listed entity may lead to developing friendly relationship between the two anddefeat the true sense of independence of the auditors. Mandatory rotation of statutoryauditors could break such a continued long-term association of an audit firm with themanagement of the listed entity.Auditors may become stale and view the audit as a simple repetition of earlierengagements. Mandatory rotation may increase the possibility that the new auditors maydetect any oversight, thereby adding to the pressure for the auditor to take a tough standon any contentious issues. Companies Bill 2012 requires rotation of auditors and statesthat no listed company shall appoint or re-appoint- (a) an individual as auditor for morethan one term of five consecutive years; and (b) an audit firm as auditor for more thantwo terms of five consecutive years. It further states that an individual auditor who hascompleted his term shall not be eligible for re-appointment as auditor in the samecompany for five years from the completion of his term. It is proposed to align therequirement of listing agreement with the Bill.11.20.Making Whistle Blower Mechanism a compulsory requirement :Presently, as per clause 49, the listed company may establish a mechanism for employees 108to report to the management, their concerns about unethical behaviour, actual or Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013suspected fraud or violation of the companys code of conduct or ethics policy. Thismechanism could also provide for adequate safeguards against victimization ofemployees who avail of the mechanism and also provide for direct access to the Chairmanof the Audit committee in exceptional cases. Once established, the existence of themechanism may be appropriately communicated within the organization.However, this requirement is a non-mandatory requirement.It may be noted that MCA Voluntary Guidelines also has a similar requirement."The companies should ensure the institution of a mechanism for employees to reportconcerns about unethical behaviour, actual or suspected fraud, or violation of thecompanys code of conduct or ethics policy. The companies should also provide foradequate safeguards against victimization of employees who avail of the mechanism, andalso allow direct access to the Chairperson of the Audit Committee in exceptional cases."Further, the guiding principles of corporate governance enlisted by MCA stresses the needto have well laid out Whistle-Blower Policy mechanism. The need for an effectivelegislation is essential in India with the growing number of scams related to corruptpractices in corporate India. There are global legislations in place, which protectwhistleblowers such as The Public Interest Disclosure Act, 1998, in the UK (which protectswhistle blowers from victimization and dismissal) and the Sarbanes Oxley Act, 2002(which provides for the protection of whistle blowers and is applicable even to employeesin public listed companies).The Companies Bill 2012 has mentioned the concept in respect of higher accountabilitystandards to be maintained by companies. Further, Clause 177 (9) of the Bill requires thatevery listed company or such class or classes of companies, as may be prescribed, shallestablish a vigil mechanism for directors and employees to report genuine concerns insuch manner as may be prescribed. The vigil mechanism shall provide for adequatesafeguards against victimization of persons who use such mechanism and make provisionfor direct access to the chairperson of the Audit Committee in appropriate or exceptionalcases.Within the legal framework specified above, companies should look to formulate andimplement their own whistleblower policies. Several large organisations have alreadyimplemented the same. A committee set up to look into the alerts raised bywhistleblowers should investigate such disclosures. A non-executive director could act asan ombudsman and take charge of such an investigation. The whistle blower policy of thecompany should be under the ambit of the Audit Committee. The identity of thewhistleblower and any other employee investigating the matter should be protected. Ifthe disclosures are found to be true, suitable action should be taken and efforts should bemade to protect the whistleblower. The action that it takes should be adequate andshould act as a deterrent against such offences in the future. The policy should be suchthat it encourages such disclosures to be made but ensures that frivolous accusations donot become a means to harass senior management. 109 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013It is propose to align the requirements of clause 49 with the provisions of the CompaniesBill.11.21.Making the Remuneration committee a mandatory one and expanding itsscope :Constitution of a Remuneration Committee is a non-mandatory requirement underClause 49. Further, the clause states that to avoid conflicts of interest, the remunerationcommittee, which would determine the remuneration packages of the executive directorsmay comprise of at least three directors, all of whom should be non-executive directors,the Chairman of committee being an independent director.It may be noted that certain well-developed jurisdictions, including US and UK, have theconcept of "Nomination committee" which consist of Independent directors, the role ofwhich, inter-alia includes, suggesting to the Board the name of the qualified persons forappointment as independent directors. The suggestion of the nomination committee canbe carried forward to the General meeting and this will ensure that there is an objectivecriteria for appointing the Independent directors and help in reducing the influence of thePromoters / major stakeholders in appointing the independent directors. Further, thiscommittee may also review the remuneration packages to the executive directors and KeyManagerial Persons regularly. The committee shall disclose the remuneration policies inthe Boards report.As per Companies Bill, 2012, Board of Directors of every listed company shall constitutethe Nomination and Remuneration Committee consisting of three or more non-executivedirectors out of which not less than one half shall be independent directors. Suchcommittee shall identify persons who are qualified to become directors and who may beappointed in senior management in accordance with the criteria laid down andrecommend to the Board their appointment and removal and shall carry out evaluation ofevery directors performance. Such committee shall also formulate the criteria fordetermining qualifications, positive attributes and independence of a director andrecommend to the Board a policy, relating to the remuneration for the directors, keymanagerial personnel and other employees. It shall ensure that the level and compositionof remuneration is reasonable and sufficient to attract, retain and motivate directors ofthe quality required to run the company successful, relationship of remuneration toperformance is clear and meets appropriate performance benchmarks; and remunerationto directors, key managerial personnel and senior management involves a balancebetween fixed and incentive pay reflecting short and long term performance objectivesappropriate to the working of the company and its goals :It is proposed to align the requirement of clause 49 with the provisions of Companies Bill.11.22.Enhanced disclosure of remuneration policies :It may be noted that, on average, the remuneration paid to CEOs in certain IndianCompanies are far higher than the remuneration received by their foreign counterparts 110and there is no justification available to that effect. Presently, Companies Act, 1956 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013specifies the limit on managerial remuneration and provides for central governmentapproval (approval for the remuneration beyond the specified limit). Similar requirementsare also incorporated in the Companies Bill.In this regard, it may also be noted that the Companies Bill requires the listed companiesto constitute "Nomination and Remuneration Committee", which shall recommend to theBoard a remuneration policy for the directors, key managerial personnel and otheremployees. While formulating the policy, it should inter-alia ensure that it involves abalance between fixed and incentive pay reflecting short and long term performanceobjectives appropriate to the working of the company and its goals. Further, as per theCompanies Bill, listed companies need to disclose in the Boards report, the ratio of theremuneration of each director to the median employees remuneration and such otherdetails as may be prescribed. The above provisions may be incorporated in the ListingAgreement.11.23.Stakeholders Relationship Committee :Presently, Clause 49 requires constitution of Shareholders / Investors GrievanceCommittee, under the chairmanship of a non-executive director for specifically lookinginto the redressal of investors complaints like transfer of shares, non-receipt of balancesheet, non-receipt of declared dividends etc.Clause 178 of the Companies Bill, 2012 mandates constitution of a StakeholdersRelationship Committee which shall be chaired by a non-executive director for companieswhich consists of more than 1000 shareholders, debenture-holders, deposit-holders andany other security holders at any time during a financial year. This committee shallconsider and resolve the grievances of security holders of the company.It is proposed to amend the listing agreement, so as to make it in line with the provisionsof Companies Bill by expanding the scope of Shareholders / Investors GrievanceCommittee.11.24.Mandating e-voting for all resolutions of a listed company :To ensure good governance, Section 192A was inserted in the Companies Act, 1956through Companies (Amendment) Act, 2000. The said section, read with Companies(Passing of the resolution by postal ballot) Rules, 2011, requires listed companies toconduct certain businesses only by way of postal ballot, instead of transacting it in generalmeeting of the company. Further, it encourages the companies to transact any otherbusiness through postal ballot. Companies (Passing of the Resolution by Postal Ballot)Rules, 2011 specifies nine businesses which should be transacted only through postalballot. In addition, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009,SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and SEBI(Delisting of Equity Shares) Regulations, 2009 requires listed companies to pass certainadditional businesses through postal ballot. However, experience shows that the postalballot forms returned are negligible. It may be because of the fact that in some cases, the 111 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013ballot forms do not reach the shareholders on time. Further, Section 192A mentions that"postal ballot" also includes voting by electronic mode.Considering the same and pursuant to the budget proposal for 2012 for providingopportunities for wider shareholder participation in important decisions of the companiesthrough electronic voting facilities, SEBI has issued circular dated July 13, 2012 mandatingthe listed companies to provide e-voting facility also to their shareholders, in respect ofthose businesses which are transacted through postal ballot by the listed companies. Tobegin with, this requirement was made applicable to top 500 listed entities. ThoughCompanies Act, 1956 requires businesses relating to consideration of the annual report,declaration of a dividend, appointment of directors in the place of those retiring, andappointment and the fixing of remuneration of the auditors to be passed at AnnualGeneral Meeting, nothing prevents the companies from offering postal ballot / e-votingfacilities to their shareholders. Further, the Companies Bill also specifically recognisesvoting by electronic means. Hence, the proposal to require listed companies to providepostal ballot / e-voting facilities for all the resolutions to be passed at general meetingsmay be explored, so as to enable wider participation of shareholders in the corporatedemocracy.11.25.Abusive RPTs :Abusive RPTs are real concerns as they can be used for personal aggrandisement ofcontrolling shareholders, especially in Asian jurisdictions, which are characterised byconcentrated shareholdings. This would dent the confidence of the investors andjeopardise the process of channelizing savings into capital market / investment. There aretwo modes for regulating RPTs - approval based controls which require approval by Boardof Directors / Shareholders and disclosure based controls required under AS-18. Focusshould not be on making approval norms stringent but on making disclosure normseffectiveSome of the proposals to curb such abusive RPTs are as follows :a)Requiring approval by shareholders for divestment of major subsidiaries :Divestment of major subsidiaries does not require shareholders approval as per theexisting law. There have been instances where ownership of major subsidiaries wastransferred to controlling shareholders, without taking the approval of othershareholders.Section 292 of the Companies Act, 1956 mentions that the powers for investing funds ofthe company have to be exercised by the board only in its meeting by means ofresolutions passed at meeting (i.e. it cannot be passed through circulation). Section 293(1) (a) of the Companies Act, 1956 requires shareholders approval for selling off whole orsubstantial part of an undertaking. However, there is no specific requirement regardingselling up of the shares in subsidiary (i.e. divesting) in the Companies Act. This has led toabuse by controlling shareholders by divesting the major subsidiaries without proper 112valuation to the companies indirectly owned by them. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013This lacuna is left uncorrected in the Companies Bill. As SEBI have powers under SEBI Act,1992 to prescribe listing conditions, which may be in addition to but not in derogation ofthe provisions of the Companies Act, we may require the listed companies to obtainshareholders approval, in case of divestment of shares in subsidiaries through inserting aprovision in listing agreement.b)Immediate and continuous disclosures of material RPTs :Presently, RPTs are disclosed to Stock Exchanges only annually. This limits theeffectiveness of the disclosure as the information reaches the investors much after thetransactions were carried out.Many of the jurisdictions such as Singapore, Italy and Israel have provisions mandatingimmediate disclosure of the material RPTs. This would help in better scrutiny of thetransactions by investors, public, regulators and the media thereby limiting scope forabusive RPTs. This requirement can be mandated by amending the reportingrequirements specified under the Listing Agreement. Suitable threshold limits for thereporting requirements need to be analyzed.c)Prohibiting / regulating grant of affirmative rights to certain investors :Whenever a company seeks funds from a private equity investor or a financial institution,it will enter into shareholders / share subscription or investment agreement. In theseagreements, it is normal to find clauses pertaining to "drag along rights" and "tag-alongrights". Apart from these rights, sometimes these agreements do grant certain superiorrights to these investors like access rights information (right to receive selectiveinformation), right to appoint their nominee directors in the board, requirements that thepresence of their nominee is necessary to constitute a quorum etc. These rights aresubsequently incorporated into the articles of the company by amending the articles.Further, in the case of Messer Holdings Limited, Bombay High Court on September 1,2010, has held that such consensual agreements between shareholders are legally valid.Though these rights are intended to protect the institutions investing their funds in thesecompanies, since these rights are not available to all the other shareholders, especiallyminority shareholders, it is debatable as to whether these superior rights may lead tooppression of minority. Apart from that, there are also concerns regarding selectivesharing of price sensitive information to these investors. Though, these may be oppressiveto minority shareholders, it appears that presently there are no restrictions for a listedcompany to enter into such an agreement, as such an amendment to articles may not,presently, be in violation of clauses of listing agreement or SEBI Regulations. The remedycan be obtained by minority holders through a petition made under Section 397 / 398 tothe Company Law Board (against oppression and mis-management).In this regard, it has to be examined whether listed company should be permitted to enterinto such an agreement granting superior affirmative rights to selective investors 113 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013d)Approval of major RPTs by Majority of the minorityMany of the abusive RPTs are undertaken between company groups controlled by thecontrolling shareholders. As such, providing for shareholders approval of RPTs may notserve the intended purpose as the controlling shareholders intended to do an abusive RPTwould have sufficient majority to obtain the shareholder approval easily. Hence, there is arequirement for mandating approval of such major RPTs by majority of the minority ordisinterested shareholders. Such a requirement is in practice in some of the developedjurisdictions.As suggested by SEBI, Clause-188 of the Companies Bill, 2012 contains a similar provisionprohibiting interested shareholders from voting in Related Party Transaction approvals.Provisions of listing agreement need to be aligned with the Bille)Pre-approval of RPTs by Audit Committee and encouraging them to refer majorRPTs for third party valuation.Presently, the audit committee reviews RPTs on a periodic basis after such transactionshave taken place. Such reviews are of limited use as the transaction could not be undoneeven if the Audit Committee expresses negative opinion on the transactions.This handicap can be removed if the requirement of pre-approval by audit committee ofmajor RPTs and major restructuring proposals could be mandated.The Companies Bill, inter-alia, requires the Audit Committee to approve or modifytransactions with related parties, scrutinize inter-corporate loans and investments andvalue undertakings or assets of the company, wherever it is necessary. Further, CompaniesBill gives Audit Committee the authority to investigate into any matter falling under itsdomain and the power to obtain professional advice from external sources and have fullaccess to information contained in the records of the company. It is proposed to align therequirements of listing agreement with the Bill.f)Approval of Managerial Remuneration by disinterested shareholdersThe remuneration paid to CEOs in certain Indian Companies is far higher than theremuneration received by their foreign counterparts and there is no justification given tothat effect. Presently, Companies Act, 1956 specifies the limit on managerialremuneration and provides for central government approval for the remuneration beyondthe specified limit. Similar requirements are also incorporated in the Companies Bill.It is observed that most of the Indian companies are managed by promoters and thisbrings in the concern of excessive managerial remuneration to executives forming part ofpromoter / promoter group, which partakes the nature of an abusive related partytransaction.Clause 188 of the Companies Bill, 2012 contains a provision prohibiting interested 114shareholders from voting in Related Party Transaction approvals. In line with the above, it Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013is proposed to consider mandating approval of disinterested / minority shareholders formanagerial remuneration beyond a particular limit.g)Expanding the scope of Related Party TransactionsPresently, related party transactions, as defined in AS-18 is considered for the purpose ofListing Agreement. The converged Accounting Standard Ind AS-24 which corresponds toIAS-24 and deals with RPTs contains a wider definition of related parties as well as KeyManagerial Persons. Existing AS 18 covered key Managerial Personnel (KMPs) of the entityonly, whereas, Ind AS 24 covers KMPs of the parent as well. There is extended coverage incase of joint ventures in Ind AS 24 whereas as per existing AS 18, co-ventures or co-associates are not related to each other. Ind AS 24 requires extended disclosures forcompensation of KMPs under different categories, whereas the existing AS 18 does notcontain a specific provision in this regard. Further, Ind AS 24 requires disclosure of "theamount of the transactions" whereas existing AS 18 gives an option to disclose the"Volume of the transactions either as an amount or as an appropriate proportion.Considering the wider coverage and more specificity of disclosure provided in Ind-AS 24, itis proposed to consider adoption of the definition and requirements in Ind-AS 24 for thepurpose of requirements of the listing agreement.11.26.Fiduciary responsibility of controlling shareholdersControlling shareholders, better known as promoters in India, who controls themanagement of the company, owe a fiduciary responsibility to the minority shareholdersand the company as a whole. There have been instances where the controllingshareholders have used the company to steer their personal interests sacrificing theoverall interest of the company, mostly through abusive RPTs.Current laws / regulations do not explicitly lays down fiduciary responsibilities of thecontrolling shareholders.In UK, FSA has proposed to reinstate the express provision that a listed company must becapable of acting independently of a controlling shareholder and its associates.Accordingly, it has proposed definitions for controlling shareholders, independentshareholders, etc. Further, proposal has also been made to mandate the listed company toenter into a relationship agreement, where it has a controlling shareholder, and that thisagreement must comply with content requirements set out by FSA which may, inter-alia,include the following :*transactions and relationships with a controlling shareholder are conducted at armslength and on normal commercial terms;*a controlling shareholder must abstain from doing anything that would have the effectof preventing a listed company from complying with its obligations under the ListingRules; 115 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013*a controlling shareholder must not influence the day to day running of the company atan operational level or hold or acquire a material shareholding in one or more significantsubsidiaries;*the relationship agreement must remain in effect for so long as the shares are listed andthe listed company has a controlling shareholder, etc.The requirement for a relationship agreement will apply to a listed company on acontinuous basis. It is also proposed to subject all material amendments to therelationship agreement to a shareholder vote that excludes a controlling shareholder inorder to allow independent shareholders to have a say in how the relationship betweenthe listed company and a controlling shareholder is managed and how it develops goingforward. In determining what constitutes a material change, the listed company shouldhave regard to the cumulative effect of all changes since the shareholders last had theopportunity to vote on the relationship agreement or, if they have never voted, sincelisting.In line with the above, it is proposed to lay down specific fiduciary responsibilities ofcontrolling shareholders and also consider the feasibility of mandating relationshipagreement between the company and the controlling shareholder specifying the dutiesand responsibilities of controlling shareholders.11.27.Strengthening Private Sector EnforcementEnforcement of Corporate Governance can be through intervention of public sectoragencies such as government, regulators and government controlled stock exchanges orthrough private sector intervention through class action suits etc. The key actors of privateenforcement may include individual shareholders and stakeholders, self-regulatoryorganisations and institutions to which supervision and regulation is delegated,privatesector stock exchanges, associations of industries, shareholder associations, etc.The OECD Thematic Review on Supervision and Enforcement has observed that privatesupervision and enforcement can complement public supervision and enforcement, but inmost countries are seldom used.In this regard, the following steps, which are expected to strengthen the private sectorenforcement, may be considered :*Recognising and encouraging proxy advisory firms*Improving financial and other support to investor associations / groups for group action*Delegating more enforcement powers to stock exchanges*Improving Investor education and awareness and the grievance redressal machinery11.28.Improving investor education and awareness for better participation anddeliberations at General MeetingsInvestor education has been hailed as the key for improving governance standards andpreventing abusive RPTs. This would not only improve the level of participation in general 116 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013meetings but also in improving the quality of deliberations happening at the GeneralMeetings.SEBI has been the front runner in conducting investor education and awarenessprogrammes.11.29.Provision for regulatory support to class action suitsPresently, Regulation 5(2) of SEBI (Investor Protection and Education Fund) Regulations,2009 mentions that Investor Protection and Education Fund created by SEBI may,interalia, be used for aiding investors associations recognized by SEBI to undertake legalproceedings (not exceeding seventy five per cent. of the total expenditure on legalproceedings) in the interest of investors in securities.Though there are provisions for oppression and mismanagement, there is no expressrecognition of class action suits in Companies Act, 1956. However, Clause 245 of theCompanies Bill, 2012 expressly provides for class action suits and Clause 125 provides forre-imbursement of expenses incurred in class action suits from the Investor Education andProtection Fund of MCA.This provision in the proposed Companies Bill, if enacted, would address the issue.11.30.Role of Institutional InvestorsCorporate governance codes and guidelines have long recognised the important role thatinstitutional investors have to play in corporate governance. The effectiveness andcredibility of the entire corporate governance system and the company oversight to alarge extent depends on the institutional investors who are expected to make informeduse of their shareholders rights and effectively exercise their ownership functions incompanies in which they invest. Increased monitoring of Indian listed corporations byinstitutional investors will drive the former to enhance their corporate governancepractices, and ultimately their ability to generate better financial results and growth fortheir investors. At present, there are four main issues with role of institutional investorand corporate governance :*Issues relating to disclosure by institutional investors of their corporate governance andvoting policies and voting records*Issues relating to the disclosure of material conflicts of interests which may affect theexercise of key ownership rights*Focus on increasing the size of assets under management rather than on improving theperformance of portfolio companies.*Institutional investors are becoming increasingly short-term investors.Several countries mandate their institutional investors acting in a fiduciary capacity todisclose their corporate governance policies to the market in considerable details. Suchdisclosure requirements include an explanation of the circumstances in which theinstitution will intervene in a portfolio company; how they will intervene; and how they 117will assess the effectiveness of the strategy. In most OECD countries, Collective Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Investment Schemes (CIS) are either required to disclose their actual voting record, or it isregarded as good practice and implemented on an "comply or explain" basis.In addition, Principle 1G of the OECD Principles calls for institutional investors acting in afiduciary capacity to disclose their overall corporate governance and voting policies withrespect to their investments, including the procedures that they have in place for decidingon the use of their voting rights.SEBI has recently required listed companies to disclose the voting patterns to the stockexchanges and Asset Management Companies of Mutual Funds to disclose their votingpolicies and their exercise of voting rights on their web-sites and in Annual Reports.Ministry of Corporate Affairs (MCA) initiative on E-voting will also enable scatteredminority shareholders to exercise voting rights in General Meetings.a)Institutional investors should have a clear policy on voting and disclosure of votingactivityInstitutional investors should seek to vote on all shares held. They should notautomatically support the board. If they have been unable to reach a satisfactory outcomethrough active dialogue then they should register an abstention or vote against theresolution. In both instances, it is good practice to inform the company in advance of theirintention and the reasons thereof. Institutional investors should disclose publicly votingrecords and if they do not, the reasons thereof.b)Institutional investors to have a robust policy on managing conflicts of interestAn institutional investors duty is to act in the interests of all clients and / or beneficiarieswhen considering matters such as engagement and voting. Conflicts of interest willinevitably arise from time to time, which may include when voting on matters affecting aparent company or client. Institutional investors should formulate and regularly review apolicy for managing conflicts of interest.c)Institutional investors to monitor their investee companiesInvestee companies should be monitored to determine when it is necessary to enter intoan active dialogue with their boards. This monitoring should be regular and the processshould be clearly communicable and checked periodically for its effectiveness.As part of these monitoring, institutional investors should :*Seek to satisfy themselves, to the extent possible, that the investee companys board andcommittee structures are effective, and that independent directors provide adequateoversight, including by meeting the chairman and, where appropriate, other boardmembers;*Maintain a clear audit trail, for example, records of private meetings held withcompanies, of votes cast, and of reasons for voting against the investee companys 118 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013management, for abstaining, or for voting with management in a contentious situation;and*Attend the General Meetings of companies in which they have a major holding, whereappropriate and practicable.Institutional investors should consider carefully the explanations given for departure fromthe Corporate Governance Code and make reasoned judgements in each case. Theyshould give a timely explanation to the company, in writing where appropriate, and beprepared to enter a dialogue if they do not accept the companys position.Institutional investors should endeavor to identify problems at an early stage to minimiseany loss of shareholder value. If they have concerns they should seek to ensure that theappropriate members of the investee companys board are made aware of them.Institutional investors may not wish to be made insiders. They will expect investeecompanies and their advisers to ensure that information that could affect their ability todeal in the shares of the company concerned is not conveyed to them without theiragreement.d)Institutional investors to be willing to act collectively with other investors whereappropriateAt times collaboration with other investors may be the most effective manner to engage.Collaborative engagement may be most appropriate during significant corporate or widereconomic stress, or when the risks posed threaten the ability of the company to continue.Institutional investors should disclose their policy on collective engagement. Whenparticipating in collective engagement, institutional investors should have due regard totheir policies on conflicts of interest and insider information.e)Institutional investors to establish clear guidelines on when and how they willescalate their activities as a method of protecting and enhancing shareholder valueInstitutional investors should set out the circumstances when they will actively interveneand regularly assess the outcomes of doing so. Intervention should be consideredregardless of whether an active or passive investment policy is followed. Initial discussionsshould take place on a confidential basis. However, if boards do not respondconstructively when institutional investors intervene, then institutional investors willconsider whether to escalate their action, for example, by*holding additional meetings with management specifically to discuss concerns;*expressing concerns through the companys advisers;*meeting with the chairman, senior independent director, or with all independentdirectors;*intervening jointly with other institutions on particular issues;*making a public statement in advance of the AGM;*submitting resolutions at shareholders meetings; etc. 119 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013f)Institutional investors to report periodically on their responsibilities and votingactivitiesThose who act as agents should regularly report to their clients details of how they havedischarged their responsibilities. Such reports may comprise of qualitative as well asquantitative information. The particular information reported, including the format inwhich details of how votes have been cast are presented, should be a matter foragreement between agents and their principals.Those that act as principals, or represent the interests of the end-investor, should reportat least annually to those to whom they are accountable on their policy and its execution.Like US funds, Indian asset management funds are now required to disclose their generalpolicies and procedures for exercising the voting rights in respect of the shares held bythem on their websites as well as in the annual report distributed to the unit holders fromthe financial year 2010-11. However, there is only a marginal increase in for / againstvotes and many funds fail to even attend meetings and have abstention as a policy. Evenamong funds that voted, there is little alignment between the votes and the voting policy.In view of above, existing policy need to be examined. It may be deliberated on how tocreate incentives for institutional investors that invest in equities to become more activein the exercise of their ownership rights, without coercion, without imposing illegitimatecosts on them, and given Indias specific situation.Fund houses should be mandated to adopt the global practice of quarterly vote reportingand fund-wise vote reporting and to adopt detailed voting policies. Further, vote reportingby fund houses should also be subject to audit.11.31.Enforcement for non-compliance of Corporate Governance NormsWhile much has been talked on the policy aspect of the Corporate Governance, at presentmonitoring of the compliance of the same is done only through disclosures in the annualreport of the company and periodic disclosures of the various clauses of Clause 49 of theListing Agreement on the stock exchange website.*As per Clause 49 of the Listing Agreement, there should be a separate section onCorporate Governance in the Annual Reports of listed companies, with detailedcompliance report on Corporate Governance. The companies should also submit aquarterly compliance report to the stock exchanges within 15 days from the close ofquarter as per the prescribed format. The report shall be signed either by the ComplianceOfficer or the Chief Executive Officer of the company.*The listed companies should obtain a certificate from either the auditors or practicingcompany secretaries regarding compliance with all the clauses of Clause 49 and annex thecertificate with the directors report, which is sent annually to all the shareholders of thecompany. The same certificate shall also be sent to the Stock Exchanges along with theannual report filed by the company. Stock exchanges are required to send a consolidated 120 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013compliance report to SEBI on the compliance level of Clause 49 by the companies listed inthe exchanges within 60 days from the end of each quarter.*Listing Agreement is essentially an agreement between exchanges and the listedcompany. BSE and NSE have listing departments, which oversee the compliances with theprovisions of listing agreement. Non-submission of corporate governance report mayresult in suspension in trading of the scrip. As per the norms laid by BSE, the securities ofthe company would trigger suspension for non-submission of Corporate Governancereport for 2 consecutive previous quarters or late submission of Corporate Governancereport for any 2 out of 4 consecutive previous quarters.For violations of the provisions of listing Agreement, following course of actions by SEBI ispossible :-Delisting or suspension of securities-Adjudication for levy of monetary penalty on companies / directors / promoters by SEBI-Prosecution-Debarring directors / promoters from accessing capital market or being associated withlisted companies.Delisting or suspension is generally not considered an investor friendly action andtherefore, cannot be resorted to as a matter of routine and can be used only in cases ofextreme / repetitive non-compliance. Prosecution, on the other hand, is a costly and time-consuming process.In order to strengthen the monitoring of the compliance, following measures may beconsidered :*Carrying out of Corporate Governance rating by the Credit Rating Agencies.*Inspection by Stock Exchanges / SEBI / or any other agency for verifying the compliancemade by the companies.*Imposing penalties on the Company / its Board of Directors / Compliance Officer / KeyManagerial Persons for non-compliance either in sprit or letterPresently, provisions of listing agreement are being converted into Regulations for betterenforcement.Public CommentsComments on the above framework may be emailed on or before January 31, 2013 toanandr@sebi.gov.in / cfddil@sebi.gov.in 121 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 FAQs on RBI as Banker to Government Updated as of 04-01-20131.What is RBIs role with regard to conduct of Governments banking transaction?In terms of Section 20 of the RBI Act 1934, RBI has the obligation to undertake the receiptsand payments of the Central Government and to carry out the exchange, remittance andother banking operations, including the management of the public debt of the Union.Further, as per Section 21 of the said Act, RBI has the right to transact Governmentbusiness of the Union in India.State Government transactions are carried out by RBI in terms of the agreement enteredinto with the State Governments in terms of section 21 A of the Act. As of now, suchagreements exist between RBI and all the State Governments except Government ofSikkim.2.How does Reserve Bank of India discharge its statutory obligation of being Bankerto Government?Reserve Bank of India maintains the Principal Accounts of Central as well as StateGovernments at its Central Accounts Section, Nagpur. It has put in place a well structuredarrangement for revenue collection as well as payments on behalf of Government acrossthe country. A network comprising the Public Accounts Departments of RBI and branchesof Agency Banks appointed under Section 45 of the RBI Act carry out the Govt.transactions. At present all the public sector banks and three private sector banks viz. ICICIBank Ltd., HDFC Bank Ltd. and Axis Bank Ltd. act as RBIs agents. Only authorised branchesof Agency banks can conduct Govt. business.3.How payment into Government account is made?All monies for credit to Government account like taxes or other remittances can be madeby filling the prescribed challans of the Government / Department concerned. Thesechallans along with the requisite amount (by way of cash, cheque or DD) are required tobe tendered with the authorised bank branches.4.When is the receipted challan for payment made into Government Account madeavailable?The receipted challans in case of cash tender are generally handed over to the remitterimmediately across the counter. In case of payments made by cheque / DD, the receiptedchallan is issued only on realization of the instruments based on the clearing cycle of thelocal Clearing House. In all such cases, a paper token is issued to the depositor indicatingthe date on which the receipted challan will be ready for delivery. The receipted challanwill have to be collected within 15 days from the date indicated on the paper token bysurrendering the paper token. 122 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20135.What if the paper token is misplaced / lost?In case of loss of original token, on a specific request and on payment of prescribed fees,the receipted challan is issued.6.What if the Receipted Challan is misplaced?No duplicate challan is issued under any circumstances. Instead, a Certificate of Credit isissued on specific request with the requisite particulars and payment of prescribed fee.7.What is the remedy if the cheque issued by Government is misplaced or lost intransit?The payee of the cheque has to approach the cheque issuing authority and apply for aduplicate cheque explaining the circumstances under which the original cheque was lostor misplaced. After satisfying himself, the drawer may issue a letter to the payee bankrequesting it to record STOP payment against the lost cheque. The bank thereafter checkswhether the cheque is already paid. If not paid, it records STOP PAYMENT order till theexpiry of the validity of the cheque and issues a NON PAYMENT CERTIFICATE.8.Are Agency banks compensated for conduct of Central / State Governmentbusiness?The accredited banks are paid remuneration by RBI for conduct of State / CentralGovernment transactions. Such remuneration is called Agency Commission.On-line Tax Accounting System (OLTAS) for Direct Taxes9.What is OLTAS?It is a system introduced in April, 2004 for collection, accounting and reporting of thereceipts and payments of Direct Taxes on-line through a network of bank branches. Thetax payers data flow from banks directly to Tax Information Network (TIN) maintained byNational Securities Depository Ltd.10.What are the major changes envisaged?Under OLTAS, only a Single Copy Challan is used with a tear off portion for the Tax Payer.The three new single copy challan in use are as under :A common single copy Challan No. ITNS 280 for payment of Income Tax on Companies(Corporation Tax) and Income Tax (other than Companies).Challan No. ITNS 281 for depositing Tax Deducted at Source / Tax collected at source (TDS/ TCS). It has two major Heads i.e. (a) 0020 for company deductees and (b) 0021 for non-company deductees. 123 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Challan No. ITNS 282 for payment of Hotel Receipts Tax, Gift-Tax, Estate Duty,Expenditure Tax, Wealth Tax, Securities Transaction Tax and Other miscellaneous directtaxes.11Does a tax-payer get his copy of the challan?No. He only gets the tear-off portion from the challan from the bank after getting it dulystamped by the bank with a unique Challan Identification Number (CIN).12.What is CIN?It is Challan Identification Number. It is a unique number containing the followinginformation :(i)7 digits BSR Code of the bank branch where tax is deposited(ii)Date of presentation of the challan (DD/MM/YY)(iii)Serial number of Challan in that branch on that day (5 digits)The CIN has to be quoted in the Income Tax Return as a proof of payment. CIN is also to bequoted in any further enquiry.13.How to obtain the new Challans?The Challans are available on the website http://www.incometaxindia.gov.in. Challansare also available at the local Income Tax Offices and also with private vendors.14.What would happen if the acknowledgement counterfoil is misplaced?Approach the bank where tax was deposited. The branch will issue a certificate afterfollowing certain procedures which contains payment particulars including CIN.15.Can the Tax payer pay Direct / Indirect taxes through internet?Yes. Most of the banks are providing the facility to their customers.16.Where can a tax-payer get the detailed procedure on OLTAS?Please visit http://www.incometaxindia.gov.in.17.What is the new procedure for payment of direct taxes at banks?The authorised bank branches accept Direct Taxes by cash or cheque / demand draftdrawn on the same branch or on other banks / branches with Single Challan. The bankimmediately returns the tear off portion of the challan duly stamped with a unique 124Challan Identification Number (CIN) when the payment is made in cash. In the case of Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013challans presented with cheque / demand draft drawn on other banks / branches, tear-offportion of the challan will be released to the tax-payer only after the realisation of thecheque / demand draft but tax shall be deemed to have been paid on the date of tender.18.How does the new system benefit the taxpayer?The new system is of immense benefit to the common taxpayer. Now a single copysimplified Challan has to be filled up replacing the earlier quadruplicate Challan. Secondly,it would be possible to obtain an acknowledgement for taxes paid at your own bankbranch immediately. Further, the acknowledgement counterfoil with the rubber stampcontaining the Challan Identification Number (CIN) assures that the payment is properlyaccounted for. The Tax payer can view the details of tax paid by him by logging on tohttp://www.tin-nsdl.com and typing the unique CIN given by the bank. (For more detailsplease visit NSDL Home page www.nsdl.co.in). Tax-payer is no longer required to attachcopies / acknowledgement of challan with the Return. He should only mention the CINdetails in the Income-tax Returns.19.Can the tax-payer still use the old forms?No. Tax is accepted only with the new prescribed challan forms. Promoting Retail Investor Participation in Government Bonds Shri Harun R. KhanI am extremely happy to be invited for this important conference on capital marketsorganized by the ASSOCHAM, I am particularly pleased as the focus of the conference is onInvestors who alongwith Issuers, Instruments, Intermediaries, (market) Infrastructure,Incentives & Innovation constitute, what I call, the 7 I critical pillars of a robust andresilient debt market. Given the low level of participation of retail investors in equity andmore so in debt markets, the specific theme of the conference aimed at the retailinvestors is most appropriate. Retail participation in financial instruments has assumedcritical importance as the decline in the overall savings rate, which has been one of thestrong points of our economy, has declined from the high of about 37 per cent to about 32per cent of the GDP and the share of household financial savings as percentage of GDPhas also declined from about 12 per cent to eight per cent last year.2. As the conference schedule indicates that different aspects relating to upscaling ofretail participation in the financial markets have been discussed, I have chosen to sharemy thoughts primarily on one very important segment of the financial market - that ofGovernment securities (G-sec) where retail participation has been unsatisfactorily non-existent. I would briefly look upon the importance of the G-sec market and the need forparticipation of the retail investor in this market, motivations for such investors forchoosing G-sec, measures taken by the Reserve Bank of India to encourage participation ofretail / mid-segment investors, constraints on their participation in this market and some 125 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013thoughts on measures that could be taken to fast-track the retail / mid-segmentparticipation in G-sec market.3. Over the past two decades since we began the financial sector reforms, Indiangovernment bond markets have come a long way. The annual gross market borrowing ofthe Government of India and the State Governments increased from 122.83 billion in1991-92 to 6686.32 billion in 2011-12. The amount of outstanding Government of Indiasecurities increased from 780.23 billion in 1991-92 to 27,881.56 billion in 2011-12. G-sec market has become broad-based in terms of participation and the sovereign yieldcurve now spans up to 30 years. The monthly volume in secondary market on theelectronic trading platform - Negotiated Dealing System-Order Matching (NDS-OM),which accounts for about 90 per cent of the trading, has increased from 314.30 billion inAugust 2005 to 2650.17 billion in November 2012. Over the years the G-sec market hasbecome broad-based, with yield curve spanning upto 30 years. The infrastructure fortrading, clearing and settlement in the form of trading platform of NDS-OM with theClearing Corporation of India Limited (CCIL) acting as the Central Counter Party (CCP) canbe considered as world class, making it one of the safest financial markets to transact. Thefact, however, remains that the market is predominantly institutional.Need for retail investors4. The traditional investor base for G-sec in India comprised banks, provident funds,and insurance companies. With the entry of co-operative banks, regional rural banks,pension funds, mutual funds and non-banking finance companies, the institutionalinvestor base has been reasonably diversified. There is, however, very little retailparticipation in the G-sec market.5. Catering to the needs of retail investors is often an essential part of the overallstrategy to develop a more diversified investor base for government securities. Reliance bygovernments on captive sources of funding whereby financial institutions are required topurchase and hold government securities is diminishing in many countries. Insteadcountries are developing a diversified investor base for their G-sec. In Indian context, theStatutory Liquidity Ratio (SLR) prescription in terms of which banks are required to holdcertain percentage of net demand and time liabilities (NDTL) has also been declining.6. Retail investors will contribute to a stable demand for government securities, which,in times of volatility, can cushion the impact of sales from institutional and foreigninvestors. Retail demand has been developed in many countries through special non-tradable instruments although this strategy will not contribute to development of thegovernment securities market. In India, retail investors invest in small saving instrumentsissued by government some of which (e.g., National Saving Certificate VIII issue) entail taxbenefits enhancing their attractiveness. These instruments, however, do not have asecondary market thereby limiting liquidity and have no possibility of capital appreciation.7. Promoting retail and mid-segment participation in G-sec market is beneficial toboth the issuer and the investor. From the issuers perspective, a diversified investor basefor government bonds is important for ensuring stable demand in the market. Aheterogeneous investor base with different time horizons, risk preferences, and tradingmotives ensures active trading, creating liquidity and allows borrowings at reasonablecost. From the investors perspective, there is a need for investment options that providedecent returns and protect the capital. G-sec are apt investment products that wouldcater to these needs. In spite of such features, there is low retail interest in the 126 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013government bonds and this investor apathy needs to be tackled by the regulators andmarket bodies.Advantages for retail investors8. For the retail investor, government securities offer one of the better options forinvestment. The advantages for retail investors can be listed as under :a. G-sec are risk freeG-sec in domestic market context are risk free and carry no credit risk. Though thisassertion is being widely debated in wake of the events unfolding in the Eurozonesovereign debt crisis, the fact remains that G-sec in the Indian context are risk free.b. G-sec offer decent yields for longer durationCurrently G-sec offer yields ranging from 8.00 per cent to 8.30 per cent and the tenor ofsecurities extend up to thirty years. With government issuing securities at different pointson the yield curve, G-sec offer an attractive option for savers who need low riskinvestment options for longer durations.c. G-sec offer prospect of capital gainsAs there is an inverse relationship between bond price and interest rate, there is aprospect of capital gains when the interest rates moderate. One, however, must beconscious of market risks that could result in losses in case the interest rate cycle reverses.d. G-sec have reasonable liquidityG-sec have reasonable liquidity and can be transacted on NDS-OM. Retail investors cantrade easily through banks and primary dealers with an SGL account in RBI.e. G-sec help to diversify portfolioInvestments in government securities would help in portfolio diversification andconsequently reduce risk for retail investors.Drivers of retail participation9. The reasons for low retail interest in government securities stems from reasons,such as, low awareness and understanding regarding the market; availability ofcompeting financial instruments of broadly similar characteristics; high transactions costsfor intermediaries and lack of convenient access to the market. For market development, itis necessary to develop efficient mechanism for delivering simple products to retail clients.In many emerging markets, the administrative and information technology costs of goingstraight to retail investors have been prohibitive. With advent of internet and wirelesscommunication systems gaining wide acceptability, this situation is, however, rapidlychanging, and possibilities for cost-efficient sale and distribution of government securitiesare increasing. Leveraging such new technology to access a broader set of potentialinvestors could also have implications for the design and functioning of the market andcould change investor profiles.10. In order to promote retail participation, it is essential to promote financial literacyand investor education, ease access to the G-sec market by leveraging technology andincentivising intermediaries including use obligation in primary dealers / banks, etc. toplace securities with end investors; incentivising Collective investment vehicles, such as,mutual funds, to cater to investment needs of the retail investors in G-sec market.11. They can also serve as an alternative placement for funds other than bankdeposits, inducing more competition in this part of the financial sector, and can be a cost-effective way for the government to reach retail investors.Measures taken by the Reserve Bank of India 127 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201312. Notwithstanding the predominantly institutional character of the G-sec market,Reserve Bank of India has recognised merit in promoting retail participation and hasinitiated several policy measures to this end (Box 1).Box 1 : Initiatives taken by Government and theReserve Bank of India to develop retailing of G-secThe Government Securities Act, 2006 : The Act has several features, such as, allowingpledging the Government securities for availing loans, legal recognition of ownership toholdings in gilt accounts, introduction of nomination facility, etc. to facilitate retailinvestors holding G-sec.Non-competitive bidding in primary auctions : Non-competitive bidding facility has beenallowed in the auction of dated Central Government securities. This facility is open to anyperson including firms, companies, corporate bodies, institutions, provident funds andtrusts not maintaining a current account or an SGL account with the Reserve Bank.Introduction of odd lot : A separate odd-lot segment has been created for the purpose ofretail participation wherein the minimum market lot size has been kept at 10,000 for G-sec and 25,000 for T-bills. Odd lot segment has trades below 50 million.Improvement in settlement mechanism : A new settlement mechanism (Multi ModalSettlement) through commercial banks has been put in place for entities not maintaininga current account with the Reserve Bank and not regulated by Reserve Bank.Retail debt segment on stock exchange : Reserve Bank has permitted trading of G-sec onstock exchanges in 2003. NSE had launched a retail debt segment to encourage widerparticipation of all classes of investors across the country (including retail investors) in G-sec. In order to attract retail investors, minimum lot size has been kept low at 1,000 (facevalue).Investor education : With a view to bringing about awareness among the smaller players,such as, co-operative banks, provident funds, trusts, etc., the Reserve Bank has beenorganizing workshops in major towns. Reserve Bank has also prepared a primer on G-secmarket which is available on the Reserve Bank website(http://www.rbi.org.in/commonman/English/scripts/FAQs.aspx?SID=7).Web based access to Gilt account holders : Reserve Bank has introduced a web-basedfacility wherein gilt account holders can participate in primary and secondary g-secmarket using internet.Incentives to financial institutions and intermediaries : PDs have been allowed to take intoaccount non-competitive bids for fulfilment of bidding commitment and prescribedsuccess ratio. Similarly, banks have been allowed for undertaking retailing in G-sec withnon-bank clients on outright basis and there is no restriction on the period between saleand purchase. A scheme of liquidity support to the gilt funds has been put in place, underwhich Reserve Bank provides collateralized liquidity support up to 20 per cent of holdingsin Government securities for a maximum period of 14 days.Widening NDS-OM membership : With a view to widening the secondary market inGovernment Securities to mid-segment investors, well-managed and financially soundUrban Cooperative Banks (UCBs) have been permitted to become direct members of NDS-OM.Retailing by PDs : In order to bring more retail and mid segment investors in Governmentsecurities market, under new authorisation policy for PDs (2011), Reserve Bank of Indiahas mandated primary dealers to achieve an annual turnover target on behalf of mid- 128segment and retail investors that should not be less than 75 per cent of minimum NOF. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013DVP-III facility to gilt account holders : To enable the gilt account holders to get thebenefit of efficient use of funds and securities, Reserve Bank has extended the DvP - IIIfacility to all transactions undertaken by the Gilt Account Holders except transactionsundertaken between Gilt Account Holders of the same custodian.13. To ease the process of investment by retail / mid-segment investors, a web-enabled platform which would seamlessly integrate their funds and securities accountshas been planned by the Reserve Bank of India. Some major banks have also initiatedmeasures like on-line trading portal for the retail investors. Recently Reserve Bank hasintroduced a web-based solution for direct participation of all gilt account holders in theprimary auction for G-sec as well as the secondary market transactions (Box 2).Box 2 : Web-based access to retail & mid-segment investors in G-secIn order to facilitate direct participation of retail and mid-segment investors in thesecondary market for G-sec, a web-based secondary market module was launched in NDS-OM in June 2012. The web-based system is in addition to the existing voice market. Beforethe launch of this facility, various non-NDS members {Gilt Account Holders (GAH)} wereplacing their bids through Primary Member (PM) i.e. the NDS Member with whom GAHshave gilt account and current account. In the web-based system, PMs continue to beresponsible for settlement of both the fund and security leg of the G-sec transactions ofGAHs. In the web-based system, the GAHs are in a better position to control their ordersand have access to real time live quotes in the market which enhances transparency.Further, they are better placed to manage their position since notifications of ordersexecuted as well as various queries are available online. The GAHs have shown areasonable interest in web-based secondary market platform.To further enhance the access of GAHs to Primary Auction system, Reserve Bank has alsointroduced an internet based solution wherein GAHs were given direct access forparticipating in primary auctions. With the introduction of this facility, GAHs have bettercontrol over their bids and can participate more effectively in the primary auction process.PMs continue to be responsible for the settlement of such bids placed by their GAH asearlier.As the Core Banking Solution (E-Kuber system) of the Reserve Bank of India replacedPrimary Auction module, Reserve Bank is in the process of providing similar features (as inweb-based system) in CBS E-Kuber system.14. Considering wide reach of exchanges, approach of allowing retail investors toaccess the G-sec market through stock exchanges can be one of the most feasible options.The Reserve Bank had also allowed buying and selling of government securities throughstock exchanges since 2003 to facilitate easier access and wider participation. Tradingvolumes, however, continue to be very low in the exchanges. The Working Group onEnhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets(Chairman : R. Gandhi) [Gandhi Committee] had examined this aspect and had maderecommendations to simplify operational procedures for seamless movement ofsecurities from SGL form to demat form and vice versa and permit banks and PDs toobtain limited membership of stock exchanges for undertaking proprietary trades in G-secon the exchanges to promote trading of G-sec on stock exchanges. Reserve Bank isexamining the recommendations in consultation with all the stakeholders. It would beinteresting to note that Australia recently passed legislation to enable retail trading ofAustralian government securities on the Australian Stock Exchange. The Australian 129 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013government has put a mid-2013 timeframe for trading to commence. All benchmarkbonds issued by the Australian government, including Treasury bonds and Treasuryindexed bonds will be available for trading. In India, by improving access to ordermatching platforms and promoting safe clearing and settlement systems, wideningaccess to retail investors is being pursued with vigour.Factors inhibiting retailing of G-sec in the Indian context15. Penetration of G-sec to individuals could not be achieved mainly on account of thecompetition from other instruments, many of them having tax benefits, such as, smallsavings schemes from the Government like Savings bonds and National SavingsCertificates (NSCs). These instruments are targeted at the retail investors and the effectivereturn on these instruments work out to be higher than the yield on marketable securitieswhich have no tax concessions.16. The predominance of institutional investors and large borrowing needs of theissuer, i.e. the sovereign resulted in market is characterised by very large transaction size.Though we have provided odd lot segment in NDS-OM for trading in small lot size, thereare not many quotes available, thereby discouraging small investors. Thus, the presentmarket for G-sec is not well suited to retail / individual investors who trade in smallamounts and are generally buy-and-hold investors. Moreover, G-sec are not activelytraded on stock exchanges.17. Since volatility in prices of fixed-income securities is low vis-a-vis equity, investorsgenerally gain through small changes in prices of debt instruments by committing largeamounts. While institutional investors, by nature, are big players who transact in largeamounts and also have access to funding markets both collateralized and un-collateralized, they are in a better position to transact in this market. Due to a lack ofsimilar facility to individual investors, they are not in a position to trade in theseinstruments. Thus, speculative interest of retail investors is minimal in G-sec.18. Normally, retail investors participate in sovereign debt market through mutualfunds. G-sec holdings of the mutual funds, however, are also very low and as per latestinformation available, their holding is around 0.5 per cent of total outstanding G-sec. Ofcourse in the recent times, thanks to huge spurt in market volumes due to transient aswell as structural factors providing huge potential for capital gains, G-sec has receivedgreater attraction of the MFs including the gilt funds. One of the reasons for lack ofadequate participation of MFs in G-sec is lack of tax concessions on income from debtoriented MFs on lines similar to tax concessions already in place for investment in equityoriented MFs. It may be noted that dividend received by unit holders, dividend distributiontax payable by mutual funds, long term capital gain are exempted from tax in case ofequity oriented mutual funds. Unlike equity oriented MFs, debt MFs are subject todividend distribution tax at the rate of 12.5 per cent. Besides they are subject to tax onlong-term capital gains at 20 per cent of capital gain after allowing indexation benefit orat 10 per cent flat without indexation benefit, whichever is less and short term capitalgains are subject to tax as per the tax bracket applicable to the investor. Such differentialtaxation acts as a disincentive for mutual funds investments.19. Lack of investor awareness is another factor impacting retail interest in G-secmarket. The market is complex and awareness of the risks and rewards relating toinvestment opportunities is limited. The terminology like yield curve, yield to maturity, etc.may not be easily comprehensible for a common investor. The market participants / 130 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013intermediaries have not been proactive in providing adequate information / investoreducation.The way forward20. In India, the need to convert savers into investors is paramount. As described in thedraft National Strategy for Financial Education large participation of domestic retailinvestors in securities market will reap dividends by increasing depth of securities market,reducing dependence on foreign investors and domestic savers reaping benefits ofeconomic growth. In this regard all stakeholders including Government, Reserve Bank andfinancial institutions must treat promoting retail participation in G-sec market as apriority. I will detail few thoughts on the steps we need to take to revitalise the retail /mid-segment participation.Improving investor awareness & education21. Knowledge empowers investors. In case of G-sec market, the investor awareness islow. The national focus on inclusive growth recognises that financial literacy andeducation play a crucial role in financial inclusion. Draft National Strategy for FinancialEducation (NSFE) for India has been prepared under the aegis of FSDC and is in publicdomain. This document clearly articulates the future vision relating to financial literacyand empowerment leading to inclusive growth. The draft Strategy seeks to create afinancially aware and empowered India. There is a need to encourage awareness amongretail investor class to promote G-sec as an alternate investment instrument. In pursuit ofthis objective, stakeholders must make concerted efforts for investor education withregard to G-sec market. Given their reach, media, both print and electronic, have also veryimportant role to play here. Banks, PDs, financial institutions and stock exchanges maytake lead in this endeavour by creating awareness about the products, risks and rewardsassociated with G-sec market. Reserve Bank has been spreading awareness to mid-segment investors by conducting training sessions / seminars on regular basis.Launching of new products22. There is merit in the issuer focusing on products catering to the retail investors. Forinstance, special bonds called Obligasi Ritel Indonesia (ORIs) are issued by the Governmentof Indonesia, especially for retail investors. These bonds carry higher yields compared toother fixed income options including time deposits and provide monthly couponpayments. These bonds are issued in denomination of Rupiah 5 million and can bepurchased by only retail investors in the primary market but they can be traded in thesecondary market by both retail as well as institutional investors. In Indian context, oneproduct that could generate significant retail interest is the inflation linked bond forretail investors. The Gandhi Committee has recommended Government of India canconsider issuing inflation-indexed bonds (IIBs) specifically for retail / individual investorssince inflation affects the poor and middle class significantly. The retail investors generallylook for asset class which could provide clean real return, i.e., an instrument which providecomplete hedge against inflation. Furthermore, in view of retail investors not havingcomplete information and technical knowhow and thus, lacking expertise in pricing,greater use of non-competitive route could be explored for generating retail demand forIIBs. Towards this end, we are considering increasing the non-competitive portion fromfive per cent of the notified amount as applicable to the primary auctions of the CentralGovernment dated securities to 10 per cent while launching IIBs. We are in discussionwith the Government with regard to issuance of IIBs as part of normal market borrowing 131program and special bonds linked to inflation could be a medium term target. Similarly Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013mutual funds could design products based on G-sec to capture investor interests. ReserveBank provides liquidity support on any day up to 20 per cent of the outstanding stock ofgovernment securities, including treasury bills, held by the gilt funds as at the end of theprevious working day, to gilt funds to encourage such funds to create a wider investorbase for government securities market.Improving access to the market23. The existing infrastructure for G-sec viz. depository, intermediaries, tradinginfrastructure is concentrated in Mumbai. This has led to the concentration of treasuryactivities of banks and PDs in Mumbai. Catering to retail investors located across thecountry, requires establishment and maintenance of a wide distribution network. Banks,by having an existing network of branches spread across the country and on a CBSplatform, and Post Offices with a wide geographical presence are well placed to offerinvestment services to retail investors in the G-sec. This potential must be tapped andleveraged as a distribution channel to cater to retail investors. Banks / PDs can createdesignated desks to focus on retail trades.Leveraging technology for promoting retail trades24. With new technologies like internet and wireless communication systems,possibilities for cost-efficient sale and distribution of G-sec are increasing. As such, there isan urgent need to leverage upon technology to provide easy and operationally convenientaccess to the retail investors. New distribution channels can be contemplated. Forexample, in Singapore bank networks / ATMs are being used to distribute G-sec. In India,some banks have started on-line trading portals for G-sec. One bank has infact vigorouslymarketing their product which provides wide accessibility to retail investors in G-sec. Thebank is also integrating its portal with the mobile banking platform. Other banks /primary dealers may consider similar initiatives for market development.Improving liquidity in G-sec market25. Secondary market liquidity in G-sec is limited to a few securities and hence it isdifficult to find a market quotes for a large number of G-sec. Due to the lack of secondarymarket liquidity, investors, especially retail / individual investors end up paying largeilliquidity premium when they try selling the illiquid (off-the-run) securities. Lack ofliquidity is a critical factor that needs to be addressed for ensuring participation by retailinvestors in the G-sec market. Gandhi Committee has examined the liquidity problem ing-sec in detail and had made recommendations like consolidation of outstandingGovernment Securities, allocation of specific securities to each PD for market making inthem; gradual increase in the investment limit for FIIs in Government securities, prepare aroadmap to gradually bring down the upper-limit on the HTM portfolio in a calibratedmanner to make it non-disruptive to the entities and other stakeholders; and promotionof the term-repo market with suitable restrictions on leverage and introduction oftripartite repo in Government Securities. Further, Gandhi Committee also suggested asuitable mechanism for market-making by PDs in the odd-lot segment. The Reserve Bankis in consultation with the stakeholders on the modalities of implementation of theserecommendations. There is also merit in the long-term, to establish, a centralized marketmaker for retail participants in G-sec who would quote two-way prices of G-sec for retail /individual investors and leverage on existing and possible infrastructure for reachingretail / individual investors.Reduction in transaction costs 132 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201326. Transaction costs for trading and maintaining gilt accounts are high for retailinvestors. Charges, such as, account-opening fee, which are high and not standardised,need review. A regime of reasonable and uniform charges is customer friendly and canlead to tangible benefits in promoting retail investments since such a move would bringin much needed transparency and induce competition among bank / PDs, which will bebeneficial to the retail investors in the long run. FIMMDA / PDAI may work towards thisobjective. In order to popularise opening of gilt accounts, the Reserve Bank of India couldconsider remunerating banks and PDs based on performance of opening gilt accounts inorder to incentivise them to cater to retail customers. Banks / PDs / depositories could alsothink of some type of basic gilt/demat accounts for limited number of transactions uptocertain amount of holdings with reduced charges for the retail investors in debt segment.Trading in stock exchanges27. Considering the reach and familiarity of the exchange platforms, promotion oftrading in G-sec on the exchanges can be an another means of activating retail interest inG-sec. Reserve Bank is considering allowing banks and PDs to become members ofexchanges to undertake proprietary trades in G-sec. Reserve Bank is also in consultationwith stakeholders to simplify operational procedures for seamless movement of securitiesfrom SGL form to de-mat form and vice versa to promote trading of G-sec on stockexchanges. It would be beneficial in this regard if the stock exchanges focus on investorawareness to encourage retail investors.Incentives for G-sec trading28. Government may consider providing tax concession on income from debt orientedmutual funds can be a measure aimed towards bringing in new classes of investors aswell as encourage further investments in G-sec by existing investors. Providing suchconcession would incentivise mutual funds and investors to increase participation in theG-sec market. This would also remove the differential tax treatment between debt andequity oriented MFs. Though there is a possibility of loss of revenue, there is highprobability that enhanced activity could neutralise the revenue loss.Summing up29. Though internationally and in India, G-sec market is predominantly institutional, itis in the interest of both the issuer and investor, that retail participation in G-sec market isencouraged. It would provide a stable source of demand for government securities andthis in times of volatility, can cushion the impact of concerted sales by sections ofinstitutional investors. Such demand is essential for financial stability and orderlyfunctioning of the markets. Reserve Bank has recognised the importance of retail and mid-segment investors many of whom are statutorily required to invest in G-sec in the G-secmarket and has taken several steps to promote the same. Improving access to bothprimary and secondary market, providing safe trading and settlement process has madeG-sec market more efficient. Working Group (Gandhi Committee) constituted to examineenhancing liquidity in the government securities and interest rate derivatives markets hasextensively studied issues pertaining to retail participation and made several usefulrecommendations. Reserve bank is evaluating these recommendations in consultationwith the market players for their speedy implementation. Certain factors, such as, lack ofinvestor awareness / education; competing instruments and high transaction costsdiscourage retail investors from participating in bond market in India. These factors couldbe addressed by taking steps, such as, improving awareness of investors, introducing new 133products, such as, the issuance of inflation linked securities would protect retail investor Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013from effects of inflation, thereby preventing loss of purchasing power, improving accessthrough leveraging technology and reducing transaction costs. Reserve Bank is committedto encourage diversification of the investor base to further deepen and widen the G-secmarket. It is also necessary that all other stakeholders like banks, primary dealers as alsothe media work in earnest to promote retail participation by actively engaging with theinvestors and focusing on providing high standard of customer service and hassle-freetransaction experience. This has become a very important imperative for our economygiven the declining share of household financial savings.30. I thank ASSOCHAM, in particular Shri Raj Kumar Dhoot, President, ASSOCHAM andShri. Prithvi Haldea, Chairman, Capital Markets Committee of ASSOCHAM for organizingthis conference and taking this national mission forward.Thank you.-----------------------------* Valedictory address delivered by Shri Harun R Khan, Deputy Governor, Reserve Bank ofIndia at the 8th Annual National Conference on Capital Markets on the theme"Confidence Building Measures for Retail Investors" on January 9, 2013 at Mumbai. Thespeaker acknowledges the contributions of Shri. N.R.V.V.M.K. Rajendra Kumar and Shri.Surajit Bose of Reserve Bank of India. FAQs on Central Depository Services (India) Limited General Depository ParticipantsGeneral1.What is a depository?A "Depository" is a provider of facility for holding and/or transacting securities in, bookentry form. Physical securities can be converted in to book entry form i.e. electronic formby way of immobilization or dematerialization. (so that they exist only as electronicrecords). India has chosen the dematerialization route. A depository functions somewhatsimilar to a commercial bank. To avail the services offered by a depository, the investorhas to open a demat account with a registered Depository Participant (DP).2.What is dematerialization (Demat)?"Dematerialization" is a process by which physical certificates are converted intoelectronic form.3.What is Rematerialisation (Remat)?Rematerialisation is the process of converting securities held in a demat account inelectronic form back in physical certificate form. 1344.Who is registered owner of Securities? Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013When securities of a company are held in physical form by an investor, name of theinvestor is recorded in the books of the company as a Registered Owner of the Securities.Each certificate is identified by Folio number, certificate number and distinctive rangenumbers. When physical securities are converted in to electronic form, the depositorybecomes Registered owner" in the books of the company and investors name is removedfrom books of the company. Since depository is holding such shares as a custodian or aguardian it cannot claim any benefit or it is not liable for any loss as a result of theholdings.5.Who is a Beneficial Owner (BO) of the securities?The original investor whos securities are held in electronic form by depository is called asBeneficial Owner (BO) since all the benefits as a result of the holding the securities aregiven to the original holder and the demat account opened by the beneficial owner iscalled as Beneficiary account.6.Who is a DP?A DP is an agent of the depository who is authorized to offer depository services toinvestors. Financial institutions, banks, custodians, stockbrokers and other types ofintermediaries specified under SEBI ( Depositories and Participants) Regulations, 1996,complying with the requirements prescribed by SEBI/ Depositories can be registered asDP. Further information on DP can be accessed from CDSLs web site www.cdslindia.com.An investor will always interact with a DP for the services and cannot directly approachthe depository for any services except for Redressal of Grievances.7.Who is an Issuer?"Issuer" means any entity, such as corporate / state or central government organizations,issuing securities which can be held in depository in electronic form.8.Who is an RTA?.An RTA i.e. Registrar and Transfer Agent is an agent of the issuer. RTA acts as anintermediary between the issuer and depository for providing services such asDematerialization; Rematerialisation; Initial Public Offers; and Corporate actions.9.What is an ISIN (International Securities Identification Number)?"ISIN" is a unique 12 digit alphanumeric code given to a security, shares, Debentures,Bonds etc. when the security is admitted in the depository system. First two digits of theISIN code indicate country of registration for the security. For all securities registered ondepository in India, the first two digits of the ISIN code are IN.10.Whether different securities issued by the same Issuer will have same ISIN? 135 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013No. Different securities issued by the same issuer will have different ISIN code.11.What are the services provided by a Depository?Depository provides following services to investors through a DP :a.Opening a demat account.b.Dematerialization, i.e. converting physical securities into electronic form.c.Rematerialisation, i.e. converting electronic securities balances held in a BO account intophysical form.d.To maintain record of holdings in the electronic form.e.Facilitate settlement of trades by exchanges / Clearing corporations by delivering /receiving underlying securities from / in BO accounts.f.Facilitate settlement of transactions between BOs entered outside the Stock Exchange.g.Receiving electronic credit in respect of securities allotted by issuers under IPO orotherwise on behalf of demat account holders.h.Receiving non cash corporate benefits, such as, allotment of bonus and rights shares orany other non cash corporate benefits given by the issuers in electronic form on behalf ofits demat account holders.i.Pledging of dematerialized securities & facilitating loans against shares.j.Freezing of the demat account for debits, credits, or both.k.Internet facilities "easi" and "easiest"l.Allotment / Redemption of mutual fund units in demat form.12.What is the legal framework governing depository functions in India?Following are the acts and regulations under which a depository functions :1.The Depositories Act, 1996,2.SEBI (Depositories and Participant) Regulations.3.CDSL Bye-laws which are framed under the above two documents.4.Prevention of Money Laundering Act (PMLA), 2002. 136 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201313.What is Destatementization?Destatementization is conversion of mutual units held in physical form i.e. statementform into electronic i.e. Demat form.14.What is Restatementization?Restatementization is exactly opposite of Destatementization i.e. Conversion of mutualfund units held in demat i.e. electronic form back into physical form.15.What are the benefits of depository to the investor and other entities associatedwith capital market?1.Reduction in paperwork.2.Reduction in risks associated with holding securities in paper form such as theft,damage due to fire etc., bad delivery in settlement process, fake / Forged securities etc...3.Faster mode of transferring securities from one account to other account.4.Elimination of stamp duty on transfer of securities which was applicable in paper form.5.Reduction in transaction cost.6.Change in details of the demat account to be submitted only to DP and subsequentlyget registered electronically with all companies in which investor holds securities.7.Faster mode of Transmission of securities to the nominee or surveying holder in case ofdeath of an account holder.8.Holding all type of capital market instruments such as equity, debt, G-SEC in a singleaccount.9.Automatic credits of securities into demat account arising out of corporate actions suchas Bonus, split / consolidation / merger / demerger etc.-----------------------------------Depository Participants16.Who is a Depository Participant?A "Depository Participant" (DP) is an agent of the depository who is authorized to offerdepository services to investors. Financial institutions, banks, custodians and stockbrokerscomplying with the requirements prescribed by SEBI / Depositories can be registered asDP. An investor will always interact with a DP for the services and can not directlyapproach the depository for any services. 13717.Who is eligible to become a DP? Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013In terms of the Depositories Act, 1996 and SEBI (Depositories & Participants)Regulations,1996, only the following entities are eligible to become a DepositoryParticipant :»Public Financial Institution»Banks including Foreign Banks»State Financial Corporation»An Institution engaged in providing financial services promoted by above mentionedjointly and severally.»Custodian of Securities»Clearing Corporation or Clearing House of a Stock Exchange»Stock Broker»Non Banking Financial Company»Registrar & Transfer Agents18.What is the criteria for Admission as a DP of CDSL?1.Fulfillment of eligibility criteria laid down under Regulation 19, sub regulation (a) to (d)of the SEBI (Depositories and Participants) Regulations, 1996 and the admission criteria asenumerated in CDSL Bye-Law 5.2.2.The minimum net worth requirement for a stock broker to become CDSL DP is Rs.2crores provided such net worth is computed in the manner specified in the OperatingInstructions issued by CDSL from time to time.3.The application which is complete in all respects and satisfying the abovementionedthreshold criteria shall be considered by the Membership Committee of CDSL on itsmerits.19.What is the procedure to Join CDSL as a DP?1.The intending DP should forward the prescribed registration form i.e. Form E* dulycompleted to CDSL. Each page of the Form-E should be stamped and initialed by thesignatory, authorised as per the board resolution. The Form-E should be accompaniedalong with the following annexures :»List of directors & last 3 years shareholding pattern of the intending DP. (details of theholding above 1 % to be given).»Brief profile of the intending DP detailing its history and activities along with detailedbiodata of directors.»List of the entities in which any director or promoter of the intending DP is also apromoter director / partner / proprietor. 138 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013»Share holding pattern and list of directors of all group companies / sister concerns /affiliates / subsidiaries / holding company and entities and the activities carried out bythem.»Duly notarised copy of Memorandum & Articles of Association highlighting the objectclause which categorically permits the applicant company to undertake DepositoryParticipant activities.»A net worth certificate computed as per CDSLs prescribed format* and should besubmitted on the letterhead of the applicants Statutory Auditors. The minimum Networth required by a stock broker to become a DP is Rs.2 Crores»Certified true copies of last 3 years Annual Reports. The last years balance sheet and P/Lstatement should be authenticated by the applicants Statutory Auditors.»An organisation structure giving details of personnel to be involved in DP relatedfunctions. A compliance officer* for DP activities should be designated in the organisationstructure.»Experience & background (previous experience and the area working) of key personnelwho will handle the DP functions.»Certified true copies of the board resolution* for joining CDSL as DP & also containing thelist of authorised signatories.»In case of clearing members, a conduct certificate from the regional stock exchangeshould be submitted in original. In case of multiple stock exchange memberships, theconduct certificate from each of these exchanges should be submitted.»Demand draft for Rs.5,000/- favouring Securities & Exchange Board of India towardsapplication fees.»Demand draft for Rs.30,000/- (with Service Tax as applicable) favouring CentralDepository Services (India) Limited towards initial application fees.»The application and payment towards VSAT or Leased Line connectivity, as per theprevailing rate at the time of making the application.2.The applicant should procure the computer hardware as per the configuration specifiedby CDSL and establish connectivity with CDSL.3.On receipt of confirmation of installation of hardware and connectivity, the completedapplication form will be forwarded by CDSL to SEBI for approval.4.On receipt of the in principle approval from SEBI, the applicant will be advised by CDSLto forward the payment towards SEBI registration and annual fees and the interest freedeposit.5.CDSL will then forward the payment to SEBI after which SEBI will grant the Certificate ofRegistration to the intending DP. CDSL will then enter into an agreement* with theapplicant on receipt of payment of various charges which will be intimated separately tothe DP by CDSL.6.The DP should forward the master creation form* duly completed to CDSL.7.CDSL will generate a unique DP-ID number for creating the DP account. This number is 139unique for each DP. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20138.The Certificate of Registration granted by SEBI is valid for a period of 5 years. Applicationfor renewal must be made 3 months before the expiry date. Such application for renewalof registration is to be made by a DP in Form E* through CDSL.20.What are the documents required to be submitted by DP for effecting change inits name?For Bank DP1.Request Letter for the change in name of the applicant Bank-DP.2.Certified true copy of the Board Resolution / Special Resolution.3.Form No. 23 showing filing of the Special Resolution with the Registrar of Companies(ROC) along with the ROC receipt showing the payment of fees. The Company can file thedocuments on-line and the Company is required to pay the fees to the banks designatedby the ROC in such cases, CDSL can act on the challan provided by the Company showingpayment of fees, if applicable.4.Certified true copy of fresh certificate of incorporation issued by the Registrar ofCompanies (ROC) for the change in the name of the Bank-DP (if applicable).5.Amended copy of the Memorandum and Articles of Association, if any.6.Original SEBI Registration Certificate as a DP of CDSL.7.Certified true copy of Second Schedule of Reserve Bank of India Act, 1934 statinginclusion of Bank in the Schedule of the said Act, with the change in name of the Bank-DP.8.Certified true copy of the License issued by RBI to the applicant Bank-DP for carrying onbusiness in India and guidelines on entry of new private sector banks with the change inname of the Bank-DP.9.Declaration that the change in name has been effected in all the registration certificatesissued by SEBI.10.Any other document(s), as and when required by SEBI.For Non-Banking Financial Companies1.Request letter for the change in the name of the Company.2.Certified true copy of the Board Resolution.3.Special Resolution stating the change in the name of the Company. 140 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20134.Form No. 23 showing filing of the Special Resolution with the Registrar of Companies(ROC) along with the ROC receipt showing the payment of fees. The Company can file thedocuments on-line and the Company is required to pay the fees to the banks designatedby the ROC in such cases, CDSL can act on the challan provided by the Company showingpayment of fees.5.Certified true copy of Fresh Certificate of Incorporation issued by the Registrar ofCompanies (ROC) for the change in name of the DP.6.Original SEBI Registration Certificate as a DP of CDSL.7.A copy of the communications received from the Stock Exchanges having noted thechange in name.8.Declaration that the name changes has been effected in the broking registrationcertificate issued by SEBI, if the Corporate DP is in the stock broking business.9.Any other document(s), as and when required by SEBI.10.Requisite permission from RBI.21.What are the documents required to be submitted for effecting change inRegistered Office Address of the DP?A.In case the registered office is proposed to be changed within the local limits1.Certified true copy of the board resolution.2. Form No.18 filed with the Registrar of Companies (ROC) along with the ROC receiptshowing the payment of fees.3.Original SEBI Registration Certificate as a DP of CDSL.B.In case the registered office is proposed to be changed outside the local limits but withinthe State :1.Certified true copy of the board resolution.2.Certified true copy of the special resolution passed at the Annual General Meeting of theCompany.3.Form No.23 and Form No.18 filed with the Registrar of Companies (ROC) along with theROC receipts showing the payment of fees.4.Original SEBI Registration Certificate as a DP of CDSL. 141 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013C.In case the registered office is proposed to be changed outside the State :1.Intimation letter for the change in registered office address of the DP.2.Certified true copy of the board resolution.3.Certified true copy of the special resolution passed at the Annual General Meeting of theCompany.4.Form No. 23 filed with the Registrar of Companies (ROC) along with the requisite ROCreceipts showing the payment of fees.5.Form No.18 filed with the Registrar of Companies (ROC) of the new state along with therequisite ROC receipts evidencing the payment of fees.6.Certified true copy of the amended Memorandum and Articles of Association of theCompany.7.Copy of the notice published in the newspaper.8.Original SEBI Registration Certificate as a DP of CDSL.9.Certified true copy(ies) of SEBI Registration Certificates of all the Stock Exchangesaffiliated with, after incorporation of the change in the registered office address, whereverapplicable.10.Declaration that the proposed change in registered office address is effected in allbroking registration certificates issued by SEBI.11.Any other document(s) as and when required by SEBI.22.What are the requirements for setting up a branch DP?The main DP is required to submit the covering letter with the relevant documents asmentioned therein, in order to set up a branch. The Branch DP-Master Creation dulycompleted should be forwarded to us alongwith the covering letter.23.Which registers are generally required to be maintained by a DepositoryParticipant? Can these registers be maintained in electronic form?The following registers are required to be maintained.(a)Register of documents received and sent for dematerialization.(c)Records for transaction statements provided to BO, giving details such as accountnumber, date of dispatch, period for which the statement was dispatched etc.(d)Investor Grievance Register 142(e)Back up register Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013(f)Power of Attorney register(g)DIS issue register(h)Nomination register(i)Suspicious Transactions register - Alerts sent by CDSLThe above mentioned registers can be maintained in electronic form provided that systemchecks and controls are in place to ensure that no unauthorized entry / deletion is done.Further, audit trails and proper back-up procedures should be in place.24.Can a DP open a BO account in spite of mismatch in the name on PAN card andaccount opening form?A DP can open a BO account in spite of mismatch in the name of PAN card and accountopening form, provided that (i) the mismatch is of minor nature (ii) the DP verifies theveracity of the claim of such investors by collecting sufficient documentary evidence insupport of the identity of the investors e.g. Additional proof of identity in the name as onaccount opening form (iii) the DP exercises extra care before opening such an account tocheck genuineness of the investor (iv) the DP keeps on record the documents and themeasures taken to establish genuineness of such an investor.25.Is it mandatory to obtain PAN of Karta for opening HUF account?Yes. Though PAN of the HUF is to be entered in CDSL system, copy of PAN card of Karta,duly verified with original, should be obtained and kept on record.26.Is nomination mandatory to open a beneficial owner account?The DP should mandatorily obtain a nomination form from a non-corporate beneficialowner (Individual / NRI / Foreign National categories), duly filled and signed by all theholders. If a beneficial owner does not wish to nominate, the option "I / WE DO NOT WISHTO NOMINATE" in the Nomination Form should be selected by such a beneficial owner.Thus, though it is not mandatory to appoint a nominee for opening of a non-corporatebeneficial owner account, it is mandatory to keep on record the option exercised by suchbeneficial owner. Further, the DPs should explain to such beneficial owner advantages ofnomination.27.If there are no securities in a BO account and the BO is not paying charges, can aDP close such an account?A DP can initiate closure of a BO account for reasons such as non payment of dues andviolation of agreement with the DP. A notice of minimum 30 days shall be given to theconcerned BO, intimating the DPs intention to close the account specifying reasons forthe same. The proof of dispatch of such notice has to be kept on record.28.If there are no transactions and no security balances in a BO a/c, do we need tosend transaction cum holding statement quarterly? 143 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013No.. A DP may be exempted from sending quarterly transaction cum holding statementsto BOs in respect of demat accounts with no transactions and no security balancesprovided that the procedure / points as given under Operating Instruction 16.7 arefollowed.29.How can a DP issue DIS booklet to a beneficial owner in case of lost / misplacedrequisition slip if the beneficial owner cannot come personally to the office of DP tocollect the DIS (e.g. BO stays at Mumbai whereas DP office is in Jaipur) ?The DP can send the DIS Booklet to the registered correspondence address of thebeneficial owner on the basis of request letter duly signed by all the holders. The DPshould take extra care if such a request for issue of DIS booklet is preceded by an addresschange request.30.Can a DP stop processing of an instruction given by a beneficial owner in case ofnon-payment of dues by such beneficial owner?DP can stop processing of an instruction given by a beneficial owner in case of non-payment of dues only if the following conditions are met :-(a)The beneficial owner has not paid its dues on its due dates or within fifteen days of thesame being demanded.(b)The DP has served a notice of at least two days on such a beneficial owner clearlystating that the processing of instructions will be stopped after the notice period in caseof non payment.(c)The pending dues are pertaining to the DP services. 144 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 The Magical World of Mathematics - The Charm, Challenges and Career Prospects Dr. K. C. ChakrabartyIntroduction1. Dr. Rajeeva Karandikar, Director, Chennai Mathematical Institute; Dr. Mrs. J.K.Phadnis, Principal of the VES College of Arts, Science and Commerce; Prof. Amiya KumarPani, Chair Professor, Department of Mathematics, IIT Bombay; Mrs. Dipta Dasgupta,Convener of this conference aptly titled Mathemight, faculty members; otherdistinguished speakers and student participants; ladies and gentlemen. I am delighted tobe here today in the midst of eminent scholars and students of mathematics. TheVivekananda Education Society has successfully completed fifty years in its "Pursuit ofExcellence in Higher Education" and I congratulate the Society on this achievement. Iunderstand that the Society is organizing frontline seminars and conferences for ouryounger generation to sow the seeds of curiosity and to enhance their knowledge base.You may recall that this year, we are celebrating the 150th birth anniversary of SwamiVivekananda, one of the greatest spiritual leaders of India. He once observed : you knowhow many sciences had their origin in India. Mathematics began there. You are even todaycounting 1, 2, 3, etc. to zero, after Sanskrit figures, and you all know that algebra alsooriginated in India. It is, therefore, very appropriate that the college, which is named afterSwami Vivekananda, is organizing this conference on Mathematics coinciding with the150th birth anniversary of Swami Vivekananda.2. This conference is most appropriately timed for several reasons. First, the year 2013has been designated by the International Mathematical Union as The Year ofMathematics of Planet Earth. Second, we have recently celebrated the 125th birthanniversary of one of Indias greatest mathematics geniuses, Srinivasa Ramanujan (1887-1920). Ramanujans true legacy is the demonstration of how a humble, untutored villageboy, with sheer passion, inspiration and inherent talent, rose to become one of the worldsgreatest mathematicians. From this perspective, this conference is perfectly positioned tocreate awareness amongst the undergraduates about the collaborative nature ofmathematics, technology, commerce, science and social sciences and the vastopportunities that mathematics can offer. In this background, I plan to talk briefly aboutthe attractions of mathematics, the need for studying mathematics, its applications, thechallenges in mastering the subject, prospects it holds for those who pursue the disciplineand about the risk of misusing mathematics.Mathematics, the Prince Charming3. What is Mathematics?a. The word itself comes from Greek Mathema meaning knowledge, study, learning.b. There seems to be no consensus among professionals on the issue of defining whatMathematics is. In fact, you will be surprised that there is even no consensus on whetherit is an art or a science.c. Definition-wise, there are three sets of definition that I am aware of :i. Logicist : Benjamin Pierces the science that draws necessary conclusions, or Russellsall mathematics is symbolic logic.ii. Intuitionist : From the philosophy of Brouwer "Mathematics is the mental activitywhich consists in carrying out constructs one after the other." 145 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013iii. Formalist : Identifying mathematics with all its symbols and the rules for operatingon them4. Mathematics is, perhaps, the oldest of sciences that has existed, developed andmatured in either explicit or in latent form over thousands of years. The concept ofnumbers was not only known to prehistoric man but may also be known to animals. Forexample, when lions hear a neighboring pride roaring, they calculate how many lions areroaring compared to the number of lions in their own pride. If there are more lions in theirown pride, or the numbers are equal, or the other pride outnumbers them by up to threeto one, they will always roar back. If the other pride outnumbers them by more than threeto one, they stay quiet. Most animals would know the difference between a bowlcontaining 4 apples and one with 8 apples or even the fact that there is somethingcommon between 4 apples and 4 oranges.5. The beauty and charm of mathematics has lured, intrigued and inspired countlessgeniuses across the globe to spend sleepless nights in the hope of unraveling itsmysteries. Why have the seekers of knowledge been attracted to mathematics from timeimmemorial? I feel the primary charm of mathematics is that it is both interesting and, ifyou can crack its intricacies, enjoyable. People like its challenge, its clarity, and the factthat in solving problems of mathematics you know when you are right. The study ofmathematics can satisfy a wide range of interests and abilities. It helps develop onesimagination and aids in building a clear and logical thought process.6. Let me share with you an example to illustrate the charm of mathematics. It is awell-known story about Ramanujan and his mentor, another famous mathematician, Prof.G. H. Hardy, who recognized his immense talent and took him to England. At one point oftime, Ramanujan was unwell and lying in an England hospital where Hardy had gone tovisit him. Hardy told him that he came in a taxi, the number plate of which had a mostuninteresting number 1729. Ramanujan was very quick in his reply. He said it was one ofthe most interesting numbers that one came across. It is the smallest positive integer,which can be written as the sum of two cubes in two different ways, viz., (12) 3 + (1)3 and(10)3 + (9)3.7. Prof. C. R. Rao, one of the most outstanding mathematicians in the world, once said,"All sciences are, in the abstract, mathematics", which aptly captures the immensecontribution of mathematics towards the development of other sciences. Perhaps,recognizing this centuries ago, Gauss termed Mathematics as the "Queen of all Sciences".Why Study Mathematics?8. Just type the words why study mathematics in a Google search and you will getaround 67 million results - these many people, institutes or articles trying to see thebenefits of studying mathematics. Study of Mathematics is extremely important for manyreasons. Maths surrounds us in many ways as we go about our everyday life. Let me nowtell you why you should study mathematics :a. Mathematics makes life simple by quantification. Numbers, units and dimensionshelp in comprehending things better and lead to precision and certainty in measurementand expression.b. It helps formulate as well as establish measurement standards in respect ofobservable phenomena.9. Take some simple examples : 146 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013a. "Ajay is tall or Ajay is strong" - What do you make of such statements. It will makesense when we compare with some benchmark or measure and quantify it. Only then dowe know what is tall or what is strong. Then things become precise.b. Suppose your parents tell you, "You have to study very hard" or "you have to studyvery very hard" - do these sentences make much sense? Yes, they certainly make. But, I amsure, "you have to get 80% marks" is something which will give you greater focus as thegoal is unambiguously stated.Mathematical concepts like measurement, which were applicable earlier only to physicalsciences, are now being made use of in social as well as biological sciences too.10. Turning to more formal discussion, one of the important features of a scientificinvestigation is its fixation with putting numbers to things, by quantification usingmathematical formulae. Often, scientific work is judged more by the quality of itsmathematics than by its empirical content. Let me quote what James Clerk Maxwell said"All the mathematical sciences are founded on relations between physical laws and lawsof numbers, so that the aim of exact science is to reduce the problems of nature to thedetermination of quantities by operations with numbers."11. Let me cite some classical examples.(i) First one relates to modeling of astronomical data, whereby you may recall howlogarithmic tables were found useful for analyzing centuries of astronomical observationscollated by Tyco Brahe and put to use by Johannes Kepler to form the basic laws ofPlanetary motion in the early 1600s. Keplers three laws of planetary motion are : (i) Thepath of the planets about the sun is elliptical in shape, with the center of the sun beinglocated at one focus (The Law of Ellipses). (ii) An imaginary line drawn from the center ofthe sun to the center of the planet will sweep out equal areas in equal intervals of time(The Law of Equal Areas) and (iii) The ratio of the squares of the periods of any two planetsis equal to the ratio of the cubes of their average distances from the sun. (The Law ofHarmonies). It is the third law that involves difficult exponentiation of squares and cubes,which does not yield easily to the naked eye when the actual data are observed. Manywould know how later Newtons universal law of gravitation could be found equivalent toKeplers laws of planetary motion. But it is also no less magical that Keplers Third Law ofplanetary motion can actually be traced back to Napiers invention of logarithms (1614),which is supposed to be the main force to derive the postulate about the third law almosttwelve years after the establishment of the first two laws.(ii) Second, I would like to cite the Mendels law of segregation of Hereditary Characters(1866), which was rediscovered at the beginning of the last century, without which,Darwins theory of evolution could not be explained statistically. Here, I would also like tounderscore that statistics is a major branch of mathematical science but with a difference.Math seems to be providing rigorous base for deterministic, logical framework ofestablishing truth whereas statistics comes out of measurements and observations witherrors.(iii) The third one is the now well-known work of the French Mathematician, LouisBachelier on the study of finance, which is treated historically as the first of its kind. HisPh. D thesis on the Theory of Speculation (1900) is credited with being the first such workon the phenomenon of Brownian Motion that was, much later, put into use to evaluatestock options. 147 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013(iv) In modern times, majority of the financial mathematics driven formulae behindpricing of different financial assets are testimony to how they can be both used andabused if not verified rigorously based on real life data.The above examples relate to close approximation to reality with the help ofmathematics, but based on well-established quantifications and measurement standards.12. Whether we deal with mechanical, electrical or electronic objects such as the light,fan, TV, car, bicycle or computers - understanding their functioning calls for use ofmathematics. We all perform tasks ranging from simple arithmetic to complexcomputations as we deal with money, deposits, insurance, income tax, and so on. Todayssociety would not be in existence without the application of mathematics. In TheRepublic, the great Greek philosopher Plato presented a profound argument for whymathematics should be required for all high school and college students. He argued thatmathematics and geometry teach problem-solving skills and an ability to analyze andthink. It is also important to study mathematics because it gives one a differentperspective on things. Learning mathematics involves a different type of thinking that isnot addressed in other subjects.Applications of Mathematics13. While we all have some familiarity with the everyday uses of the elementaryaspects of mathematics, there are far more advanced and complex phenomena in almostall fields of science, where mathematics is widely used, but often in an unseen andunadvertised way. Let me give only a few examples of diverse applications ofmathematics :i. Travel by airplane would not have been possible without the mathematics of airflowand control systems.ii. The spaceships journey to the planets could not have been calculated without themathematics of differential equations. The stunning pictures of far away planets sent byVoyager II could not have had their crispness and quality without mathematics.iii. The advances in development of supercomputers is backed by the application ofmathematical theory which instructs the computer on what is to be done, therebyallowing it to optimally utilise its capacity for speed and accuracy.iv. The next generation of software requires the latest methods in Category Theory, atheory of mathematical structures which has given new perspectives on the foundationsof mathematical logic.v. Mathematical methods provide the backbone of Statistical theory and methodologyfor the analysis of wide varieties of data in Economics, Banking, Finance, Physical Sciences,Genetics, Biology, and so on.vi. Body scanners are the expression of subtle mathematics, which makes it possible toconstruct an image of the inside of an object from information on a number of single X-ray views of it. Thus, mathematics is often involved in matters of life and death.14. These applications have often been developed from the study of general ideas fortheir own sake : numbers, symmetry, area and volume, rate of change, shape, dimension,randomness and many others. Mathematics makes a special contribution to the study ofthese ideas, namely, the methods of (a) precise definitions; (b) careful and rigorousargument; representation of ideas by many methods, including symbols and formulae,pictures and graphics; (c) means of calculation; (d) obtaining precise solutions to clearlystated problems, or clear statements of the limits of knowledge. These features allow 148 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013mathematics to provide a solid foundation to many aspects of daily life, and to give acomprehension of the complexities inherent in apparently simple situations.15. However, while mathematics is applied to both physical sciences and social /biological sciences, there are certain differences in the application of mathematics to thetwo areas. As physical sciences are more exact in nature, mathematics can be readilyapplied to them. However, social / biological sciences are more uncertain and involveelements of errors. Hence, statistics and probabilities find greater application in theseareas. You, as students, have to decide on the area which is of greater interest to you andpursue knowledge and excellence in that area.Maths in Indian Context :16. What is Indias contribution to the subject of Mathematics? Let me refer to an oldsong from the movie "Purab aur Paschim" (lyrics : Indeevar and others) picturised on the i baat sunaata - how many of you have heard? I am sure all of the speakers here and even theteachers. The song has some excellent lines depicting Indias contribution to the subject ofMathematics. The lines are as under :Loosely translated, extolling the contribution of India to the field of mathematics andastronomy, the protagonist conveys that "It was only with the invention of zero by Indianmathematicians that the World could get its number system. Also, without Indiascontribution to the decimal system, it would not have been possible to fathom thedistance between Earth and the Moon or to manage a voyage to the Moon".17. It is necessary to reminisce about the past heady days of Indian mathematics,beginning from the Vedic period. The ancient Vedas (synthesized about 5000 years ago)contained Vedanga Jyotisha comprising three parts, one of which pertains to basic mathabout arithmetic, algebra, geometry, trigonometry and equations (Sameekaran). Indiasprimacy in establishing the foundations of math is widely accepted among the scholarsand practitioners in math. It is apt to note what the famous French mathematicianLaplace (1749 - 1827) had remarked : "It is India that gave us the ingenious method ofexpressing all numbers by means of ten symbols, each symbol receiving a place valueposition as well as an absolute value. The idea escaped the genius of Archimedes andApollonius". While the Indian system of counting has been the most successfulintellectual innovation ever made, the most intelligent invention is that of zero, theinclusion of which added much needed wholeness and completeness to the system ofnatural numbers and for making it the very basic building block of the real numbersystem. Unfortunately, the rich heritage and achievements of our ancient and pre-medieval Indian mathematicians were sort of rediscovered and then reintroduced fromthe West in the regular curricula on mathematics.18. It is, indeed, very saddening to note that for the past 2000 years Indiascontribution in the field of mathematics has been negligible. We should not rest on ourpast laurels and allow complacency to set in. We need to re-establish our position of 149preeminence in the area of mathematics and mathematical research by contributing new Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013thoughts and concepts to the body of knowledge on mathematics. Our students andteachers of mathematics and others associated with the academic world have tocontribute significantly to make it happen.Mathematics is challenging19. One should, however, remember that mathematics is also one of the mostchallenging disciplines. It calls for special skills and mental ability to visualize themysteries of the universe through abstract patterns, symbols, structures and formulae,which is mathematics. As Galileo said many centuries ago, "The great book of nature canbe read only by those who know the language in which it was written. And that languageis mathematics."20. I must add a word of caution here. I believe that you must have the necessaryaptitude for studying higher mathematics. In case you do not have the numerical aptitudeand liking for numbers, please do not pursue higher studies in mathematics.Mathematics as a Career Option21. Those who qualify in mathematics are in the fortunate position of having a widerange of career choices. Their abilities (i) to use logical thought; (ii) to formulate a problemin a way which allows for computation and decision; (iii) to make deductions fromassumptions; (iv) to use advanced concepts, are all enhanced by a mathematics degreecourse. It is for this reason that mathematicians are increasingly in demand. With amathematics degree, you should be able to try your hand in banking and finance,statistics, engineering, computers, teaching, econometrics, biometrics, or accountancywith a unique edge that may not be available to those graduating in other streams.22. Thus, one of the benefits of studying mathematics is the variety of career optionsthat open up. A recent survey has shown that graduates in mathematics and computerscience were at the top of the earning lists, six years after graduation. In one such study inThe Wall Street Journal (2009) on the best and worst jobs in the US, it was observed thatthe top three out of the best two hundred jobs listed in order of income and other factorswere careers suited for math majors, namely, mathematics, actuary and statistics. Besidesother favorable conditions like indoor working conditions and places free of toxic fumes ornoise, the study also considers pay, which was determined by measuring each jobsmedian income and growth potential. Another recent survey shows that the top 15highest-earning college degrees have a common element : mathematics.23. Some of the preferred career options for students of mathematics are : (a)Mathematics proper as teaching assignment as well as research in the theoretical aspects;(b) Actuarial science that develops applied tools using mathematics and statistics andusing them in finance and insurance; it includes a number of inter-related disciplines,including probability and statistics, finance, and economics; (c) Computer science, basedon the theoretical foundations of computation and their implementation and applicationin computer systems. Students of maths, with their training in logical and precisethinking, are highly prized in this field. (d) Operations research, developed as aninterdisciplinary branch of mathematics to arrive at optimal decisions to problems inmaximizing or minimizing things like costs or profits. (e) Biomathematics ormathematical biology, also an interdisciplinary field of study that helps in modelingnatural and biological processes using mathematical techniques and tools. Results havebeen applied to areas such as cellular neurobiology, epidemic modeling, and populationgenetics. (f) Cryptography is the practice and study of hiding information. Cryptography is 150considered to be a branch of both mathematics and computer science. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201324. While applied mathematics is appreciated and understood by many people, puremaths is considered very elitist. Another career and research prospect that has gottremendous boost of late is computation based analysis, which many purists do notaccept as mainstream mathematics. Actually, many IT professionals who joined in the bigleap of Silicon Valley revolution in the last couple of decades are now increasingly findingthis job of analytics more rewarding and challenging.Where Math can help in Central Banking25. Two important areas of application of Mathematics, more specifically Statistics,are economic modeling and forecasting, and financial mathematics. Central Banks aroundthe world are engaged in developing a suite of modern macroeconomic / econometricmodels of the economy as a basis for informed macroeconomic, monetary, financial sectorand fiscal policy decisions. It is now of critical importance, particularly, in light of thecurrent challenges facing the economy. The importance of modeling macroeconomicvariables has become all the more critical because macroeconomic policy formulationneeds to anchor its functional role in developing a full understanding of the economy aswell as influencing domestic policy formulation in a logical framework.Let me explain what is modeling and why it is important :It is trying to study and analyse different phenomena. For this - you have to quantify thephenomenon so as to be able to relate to them. For example, how much space does a boxcontain?We know volume = length X width X height and as the length, width and height can bemeasured, we have a simple model to represent the space inside a box.26. Financial mathematics is a relatively new discipline, rooted in modern economicthought, yet steeped in the classical intellectual disciplines of chance and uncertainty.Tracing its origins to the early 1970s, and maybe more so, to the introduction of thepersonal computer, financial engineerings early triumphs include the development ofstructured mortgage-backed securities (now the biggest bond market) and a rationale foroption pricing - the consequences of which are totally pervasive in modern investing, themarkets, and finance. Central Banking job has been made much more challengingbecause it needs to understand, may be ahead of others in a forward looking framework,the finer aspects used to construct and deploy the financial transactions and processes.These are the mechanisms enabling the creation / employment of wealth and for theworldwide distribution of well-being within the constraints and intent of global financialpolicy.27. Modeling exercises in macroeconomics have been rendered more complex andarduous because of complexities and nonlinearities displayed by behavioral aspects ofeconomic agents. The traditional economic models depended heavily on linearization ofcomplex economic behavior expressed in simple mathematical terms.28. Like much of engineering, financial mathematics constructively uses fundamentalmathematical and scientific principles with professional practices to yield products andprocesses. Rather than trying to understand the socio-economic interplay of wealth andwell-being, financial mathematics considers a flow of cash (the cash-flow) : its exchange,its contingency, and its value both in a relative and an absolute sense. These could befrom the standpoint of the investor (central bank, insurance company, mutual fund, forexample), a Wall Street dealer, a global bank, or a hedge fund. The flow of cash could bepackaged as a stock, bond, option, swap, or exchange of currency. 151 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201329. Unlike positive sciences like physics and chemistry, one has to take a lot of carewhen dealing with behavioural sciences like economics and finance. Lots of measurementand benchmarking issues come up, particularly, in the modern complex world of businessand commerce that await proper quantifications and standardization with precision andrigor. Many would have read how floating of risky financial products, not tractable by theestablished norms of controllable behavioral norms, jeopardized functioning of marketsand the global economy. With the expanding scope of business and finance, demand formathematical acumen and empirical analyses have become ever increasing. However, weneed to guard against utter predominance and capture of the finance profession by thestudents of mathematics.Problems with numbers - Life in a Central Bank is as challenging as is the real life30. Now that I have shared with you the uses of mathematics in Central Banking, letme also discuss some challenges / difficulties that the use of numbers pose in our day-to-day office work vis-a-vis the general perception prevalent in the public domain due toimproper interpretation of maths. Let me give three examples :a. Gold Purchases : You may have come across news reports about the large currentaccount deficit facing the country and the large import of gold being one of the importantreasons for this. We often hear the argument that people buy gold as a hedge againstinflation or that they are investing in a safe asset. These people use, or should one say,misuse mathematics to buttress their argument by relying on the figure of gold priceappreciation in the recent past. However, to me, the data on gold price appreciation is themost convincing argument for why investing in gold is neither a hedge against inflation,nor a safe asset. Let me explain. What is the characteristic of a hedge against inflation? - itshould protect your principal by giving a return slightly above the inflation rate. However,the rate of gold price appreciation in the recent past has been far in excess of the inflationrate and, hence, cannot be characterized as a hedge. In contrast, it can be termed asspeculation against inflation. Similarly, the fundamental principal of risk-return trade-offstates that greater returns can be achieved only by assuming greater risks. Thesignificantly higher returns offered by gold in the past few years only indicates that therisks implicit in investing in gold have also significantly increased. Even if we calculatevolatility in the gold prices over a longer time horizon, it would be far in excess of thatobserved in other financial assets. Hence, the rationale for investing in gold as a safeasset is contrary to conventional wisdom of what constitutes a safe investment.Mathematics disapproves that gold is a hedge against inflation or that it is a safe asset.Unfortunately, this is not fully understood either by investors in gold or even a significantsection of opinion makers and policy makers. We have no problem if proponents of goldencourage gold purchases by portraying it as a speculation against inflation or a riskyinvestment (i.e. right use of mathematics) rather than by calling it as a hedge againstinflation or a safe investment (improper use of mathematics).b. Productivity in Banks : In banks, one of the most commonly used measures ofproductivity is Business per Employee. However, any student of mathematics having somebasic understanding of the concept of unit and dimension will say that Business perEmployee may be a good measure of productivity across space but a very poor measure ofproductivity over time. If we use this ratio as a measure of productivity over time in banks/ financial institutions for deciding manpower issues, viz. recruitment of staff,promotions, etc., consequences would not only be erroneous but can also be dangerous. 152Even in deciding on the number of General Managers (GMs) or Executive Directors (EDs) Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013to be provided to banks, policy makers are depending on the volume of business. Can wenot decide on these issues in a better way by proper use of mathematics, say, based onstaff expenses per 100 rupees of asset / business or salary paid to GMs / EDs as apercentage of total assets / business of banks?c. Financial inclusion and numbers : I am sure you have heard of our initiativestowards financial inclusion, the business correspondents, the basic banking accounts, etc.Banks often use number of accounts and number of transactions as two indicators formeasuring progress in financial inclusion. It is common for banks to claim progress infinancial inclusion stating that the number of accounts opened has gone up by 100% overa period. This use of mathematics to claim progress in financial inclusion can be terriblymisleading. On delving deeper, one realizes that while 100 accounts in the previous periodhave, indeed, increased to 200 accounts, there is no substantive progress in terms ofbanking penetration and financial inclusion in real terms, since the total number ofvillages covered, number of BCs employed, have also increased manifold during theperiod. The increase in number of accounts is, thus, merely a reflection of the expandedgeographical coverage and not of any improvement in banking penetration in existinglocations. Similarly, the number of transactions made per month may have gone up from50 to 100 but, simultaneously, the total number of accounts may also have gone up from200 to 1000. Thus, this 100% increase in the number of transactions does not indicate anincrease in efficiency or deepening of financial inclusion. Number of accounts per 1000population and number of transactions per account are better mathematical ratios tojudge the progress in financial inclusion.31. The above three examples that I have given based on my day to day officeexperience, are only indicative of the irrational choices that could be made, ifmathematics, as a decision making tool, is not properly used. The students ofmathematics must, therefore, be extremely careful as conclusions based on improper useof numbers can lead to adverse policy decisions.Conclusion32. The key message that I want to convey, particularly to the students, is that notonly the past, but also the future of mathematics and mathematicians is glorious andbright. While mathematics, in its pure form, is scaling greater heights, the horizons of itsapplications in various classical and new fields of science are expanding at a fast pace.Besides the physical and biological sciences, new applications are found in economics,finance, banking and many other fields. In view of such diverse applications ofmathematics, the whole world needs mathematicians. Internationally, Indian studentsand scientists are considered to have a reputation in mathematics. There is a need tonurture and sustain this natural advantage which will attract bright students to the fieldof mathematics and also provide them with numerous career options. However, in view ofthe numerous applications of mathematics, students have to identify their areas ofinterest and develop domain knowledge in that particular area. While a career inmathematics research could be pursued by those with a passion for it, others need tofocus on building up specialized expertise in their chosen area of application ofmathematics.33. While concluding, I would always want you to be like the mathematician in thestory that I am going to tell you :A mathematician, a physicist, and an engineer were traveling through Scotland when they 153saw a black sheep through the window of the train. "Aha," says the engineer, "I see that Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Scottish sheep are black." "Hmm," says the physicist, "You mean that some Scottish sheepare black." "No," says the mathematician, "All we know is that there is at least one sheep inScotland, and that at least one side of that one sheep is black!"34. I would end by once again thanking the organizers for inviting me to this forumwhich, I am sure, will generate valuable awareness and insight about the prospects formathematics and mathematicians. I have told you so much about maths, its applicabilityin central banking and problems with numbers that I encounter in my day to day work atthe RBI, I hope that all of you will study mathematics, make a name and a great career foryourself. I wish you all a bright future and the Conference all success!Thank You.--------------------------------------1 Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India atMathemight, a conference organized by the Department of Mathematics of the V.E.S.College of Arts, Science and Commerce, Mumbai on January 18, 2013. Assistance providedby Shri A.B. Chakraborty, Shri Sanjoy Bose and Shri Shailendra Trivedi in preparation of thisaddress is gratefully acknowledged. Financial Inclusion of Urban Poor in India Dr. K. C. ChakrabartyMs. Lata Krishnan, Chair, American India Foundation (AIF); Mr. M. A. Ravi Kumar, CEO, AIF;Prof. Sanghmitra S. Acharya, Jawaharlal Nehru University; Mr. Pradeep Kashyap, ViceChair, AIF; Mr. Michael Markels from the World Bank; Ms. Kavita N. Ramdas, Ms. Madhu P.Kishwar, Mr. Mathew Titus and Ms. Sujata Lamba, the panelists for todays discussion, Mr.Hanumant Rawat, Director, AIF; delegates at the seminar, ladies and gentlemen. It is apleasure to be here today at the fifth Annual National Seminar being conducted by the AIFin New Delhi. I am happy to see that Dr. Pradip Sarmah from Guwahati, who is a pioneerin the design of light weight rickshaws and organizing Joint Liability Group for rickshawpullers, is present here today.2. I am very glad to note that from a very humble beginning in 2001, AIF has emergedas the leading non-profit organization in the country, involving Indian-Americans,dedicated not only to the task of upliftment of Indias poor but also to development of avibrant social ecosystem. In collaboration with grassroot NGOs and government agencies,AIF has been successfully running several projects related to education, livelihood, andpublic health, with emphases on elementary education, womens empowerment, and HIV/ AIDS, respectively. I understand that AIF has so far reached out to more than 1.7 millionof Indias less fortunate and successfully transformed their lives by providing them asustainable means of livelihood. Though on a standalone basis, number of lives touchedby AIF is very impressive, it simply dwarfs in comparison to the sheer enormity of thechallenge that we, as a nation, face i.e. of reaching out to a population of 1.2 billion. Evento reach remotely close to the target number, we would not only need scaling up of effortsby institutions like AIF, but also the involvement of many more such governmental andnon-governmental organizations. Our experience with the Financial Inclusion programshas highlighted that unless the intermediaries involved develop sustainable delivery 154models and are able to run these activities as a viable business proposition, success would Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013remain elusive. Therefore, apart from a sense of commitment, what we really need forthese drives to succeed is a sustainable delivery model, which other institutions couldimbibe from AIF and emulate.3. It is, indeed, very heartening to note that the AIF has chosen to focus on the subjectof Financial Inclusion of Urban Poor for its Annual Seminar and I compliment theFoundation for this. As you all know, financial inclusion has been a key area of focus forthe Reserve Bank of India and I firmly believe that forums such as this provide us anopportunity to put our minds together to introspect on what more needs to be done tomeet the ambitious goals we have set for ourselves. I, therefore, thank the organizers forinviting me and providing me the opportunity to present my views on the topic.4. Though the Indian economy has witnessed tremendous growth lately, vast sectionsof our society have remained excluded from the India growth story due to various socio-economic factors. It is ironic that despite our cities seeing widespread affluence, largepockets of financial exclusion should exist right at the very heart of these cities. Everyyear, a large number of people migrate from villages to cities in search of a better life forthemselves and their families. They take up non-contractual and non-permanent jobs ofvendors, porters, hawkers, construction workers, domestic workers, rickshaw pullers, etc.These people need fast, low cost, convenient and safe avenues of savings, credit andremittances to meet their needs. However, in view of the non-permanent nature of theiroccupations, they frequently shift base within city or even across cities. Bankers aregenerally found to be shy in providing them banking services, for obvious reasons.What do we mean by Financial Inclusion?5. Before I turn to the specifics of Financial Inclusion of urban poor, let us spend aminute in understanding the meaning of the term itself. We have defined FinancialInclusion as "the process of ensuring access to appropriate financial products and servicesneeded by all sections of the society in general and vulnerable groups such as weakersections and low income groups in particular, at an affordable cost, in a fair andtransparent manner, by regulated, mainstream institutional players". Financial Inclusion isimportant not only from the perspective of the benefit it provides to the poor but alsofrom the perspective of overall stability of the social and economic system of the country.Financial Inclusion of the poor has a multiplier effect on the economy as a whole, throughhigher savings pooled from the vast segments of the population present at the bottom ofthe pyramid. There is a potential for transforming the lives of these excluded groups byproviding access to formal savings arrangements and extension of credit by banks foremergency and entrepreneurial purposes, thereby enabling the poor to create assets,generate stable income, build resilience to meet macro-economic and livelihood shocksand bring about an improvement in their financial condition and living standards.Our Strategy for Financial Inclusion6. Financial Inclusion is an integral part of policy making at Reserve Bank of India. Wehave taken significant steps in the form of regulatory relaxations, introduction ofinnovative products, and various supportive measures towards this objective. We haveadopted a bank-led approach for financial inclusion in the country and encouraged theleveraging of technology while remaining neutral to the technology choice made byindividual banks. The effort made by all stakeholders has resulted in increased reach ofbanking services to hitherto excluded remote locations. Today, banking connectivity hasreached nearly 204800 villages through brick and mortar branches, Business 155 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Correspondents (BCs) and other modes. During the last 3 years, 96.25 million BasicSavings Bank Deposit Accounts (including erstwhile No Frill Accounts) have been opened.Exclusion of the Urban Poor7. The rural inhabitants have largely remained the focus of our financial inclusionefforts since a large proportion of our villages are still unbanked. This has also been underthe premise that the reach of banking network in urban areas is already quite high and,hence, access to banking services should be available to all. The ground reality, however, isquite shocking. The problem of exclusion is widespread even in urban areas, especially, forthe disadvantaged and low-income groups, despite there being no dearth of bankbranches. As part of the financial inclusion drive, while banks have opened 13434 BCoutlets in urban localities during the last 3 years, the progress is far from what was hopedfor. Many of the urban poor still have no access to formal financial products and serviceslike savings, credit, remittance and insurance, forcing them to depend on usuriousinformal sources to meet their personal, health, and livelihood-related needs. Notsurprisingly, they struggle to repay such borrowings, which further impede their ability toescape the vicious circle of poverty.Migrant Workers8. One important section of the urban poor, which is adversely impacted by theproblem of financial exclusion in urban areas, is the migrant workers group. Migrantworkers in urban areas mostly comprise people from low-income households whogenerally leave their village homes in search of better income and employmentopportunities. Many of these people work and live at their work sites and are paid dailywages. They need a secure place to keep their savings and the facility to remit smallamounts of money at frequent intervals. In most of the migration corridors, the migrantshave outstanding loans at their origin points, mainly from informal sources, and theremittances are the major source of loan repayment.Rickshaw pullers9. Before we delve into the issues that plague the financial inclusion efforts for theurban poor and the migrant workers, let me spend some time talking about oneimportant sub-section of this population, the rickshaw pullers - a group which is the focusof the initiatives made by the AIF under the Rickshaw Sangh programme. Rickshaw Pullersprovide a much needed and valuable public service, especially for the low income groupsin cities, at very cheap rates. In areas where lanes and by-lanes are too small for vehiculartraffic, cycle rickshaws are the only practical means of transport. In most cities, in theabsence of any feeder service between the major transport network stations like railways,metro rail, bus, etc., there is always a demand for cycle-rickshaws.10. While no pan-India study on rickshaw pullers is available, it is estimated that thereare about 8 million rickshaw pullers in the country, with only about 1.1 million beingregistered at various municipalities. With an average of five persons dependent on eachrickshaw puller, close to about 40 million people are dependent on rickshaw pullers fortheir subsistence, making it an important livelihood source for a sizeable section of ourpopulation.11. Typical of the migrant labour communities, the rickshaw pullers also seldompossess dependable identities, references or contacts. They, usually, do not have access toinstitutional finance and, hence, find it difficult to raise funds to purchase their ownrickshaws. According to available data, 90-95% of rickshaw pullers rent rickshaws on a 156daily basis and pay rentals as high as .25 - 50 per day, which could, thus, add up to Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 20131500 per month, for a rickshaw costing 10000 - 12000. They pay such usurious rents foryears but never become owners of the rickshaw. On days when the rickshaw puller doesnot take up the activity due to illness, social events, or other reasons, he does not have anyincome. Moreover, during the cropping season, the rickshaw pullers often return to theirhome towns, resulting in disruption of their regular occupation. All this results in themhave irregular and unstable income, which is vulnerable to disruption by a multitude offactors. Having their own rickshaws would encourage them to continue with theiroccupation all through the year, and help in bringing consistency in their income streams,which is essential for any kind of financial planning.12. It is, therefore, important that there is an effort to extend support to these groupsso as to make their livelihoods sustainable. The initiative taken by the AIF in bringingtogether various stakeholder groups to improve the economic prospects of the rickshawpullers is, indeed, commendable and I hope that the Rickshaw Sangh programme isextended all over the country and that it succeeds in bringing about a credibleimprovement in the quality of lives of this hard working group.13. Some experiments have already been done by adopting a Joint Liability Group(JLG) model for delivery of rickshaw loans. For instance, under the Punjab National Banks"JANMITRA RICKSHAW FINANCING SCHEME", need based loans are provided to desirouspersons on easy terms and conditions so that these people can come out of the clutchesof money lenders. The financing is done under tie-up arrangement with NGOs sponsoredby American India Foundation Trust (AIFT) as well as other local NGOs. The NGO arrangesfor completing the formalities like registration with the local Municipal body. The extentof loan includes the cost of the rickshaw, cost of uniform, license fee for two years andthree years premium for life and health insurance of the rickshaw puller. In this instance,a special design of rickshaw was created in association with IIT Guwahati, which resultedin a light weight rickshaw that ensured an all-weather comfortable seating for passengersand sufficient space for storage of luggage. This also ensured a unique identity of therickshaw financed under the scheme. The design of the rickshaw had sufficient space foradvertisement on the back. The guarantee of partnering NGOs is an assurance to the bankas well as the manufacturers. The banks have lesser risk to deal with; the individuals aresupported by the quality check of the rickshaws; and the manufacturers are assured oftheir payment by the bank.14. There are scores of success stories under this scheme, which has resulted inproviding employment to several poor people and helping them live a dignified life. Theircollectivization and empowerment through the instrument of credit and the consequentmeans of livelihood - the rickshaw, seems to be a turning point in their lives. In thisexperiment, change in the income levels is evident, supplemented by the improvement inthe perception of self. A large number of homeless and identity-less migrant labourersbecame rickshaw owners and got integrated with financial services of the banks.15. The Rickshaw Sangh programme has, currently, been rolled out in 18 cities in 6states. As per data provided to me, more than 40000 rickshaws have been covered underthe programme with total credit extended being 140 million. One important feature ofnote in the Rickshaw Sangh programme is that it is not just restricted to providing arickshaw to the target group, but also includes providing necessary municipal permit,insurance (both on the asset and on the life), bank account, photo ID and a uniform. Thisbundled approach greatly improves the impact the programme is likely to have on the 157beneficiaries. At this stage of the Rickshaw Sangh programme, it is heartening to note Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013that an assessment of the programme has been carried out with the objective ofunderstanding the impact it has had on the beneficiaries and other stakeholders involvedin the programme. Besides, it also seeks to ascertain the non-economic impact that theprogramme would have had on the beneficiaries. I do hope that the outcome of the studyprovides valuable guidance on how to take the programme further in terms of both itspenetration across the country and the impact it has on the social and economic lives ofthe beneficiaries.16. In my opinion, a major issue that projects focusing on the economic upliftment ofthe poor often face is the lack of adequate emphasis on proper training and capacitybuilding, which seriously debilitates the ability of the beneficiaries to manage their assetsand income without adequate handholding. A major challenge to the success of projectsfocusing on improvement of living standards of the rickshaw pullers is the non-availabilityof a standardized and comfortable rickshaw model. In a country which has a boomingcycle industry with an impressive export pedigree, there are no organized manufacturersof cycle rickshaws. In the absence of standard designs, the local manufactures wastemuch time and effort in building a rickshaw. I hope AIF would look into this aspect, tie upwith some major manufactures, urge them to build on existing research, such as the onecarried out by IIT Guwahati, and design standardized, modular, cost-effective machines,which can be easily dismantled and reassembled at locations away from manufacturingbases.Impediments in Financial Inclusion of Urban Poor17. Let me now return to the key impediments in achieving Financial Inclusion of theurban poor. Among the factors keeping the urban poor and the migrant workers out ofthe formal financial system are their low and irregular earnings, migrant nature of thepopulation, inability to produce adequate documentation, bigger family size with singleearning member and financial illiteracy leading to poor money management skills. Theyare also deterred by problems in understanding language, inconveniences related totravelling and waiting time and other conditions that come with the formal financialsystem. It is, indeed, sad that many migrant workers do not have adequate informationabout the remittance facilities offered by banks, and even those who have accounts withbanks, do not use them effectively. Furthermore, only a few migrants and their familiesare insured against the risks they face every day. As a result of lack of financial literacy andgeneral apathy, even those who have money continue to keep their savings either athome or prefer to participate in informal savings schemes like chit fund.18. There is no denying the fact that the informal sources are attractive and pervasivein cities due to the speed and ease and the multiplicity of services they can give. That iswhy the poor prefer to borrow from informal sources even at exorbitant interest rates of5-8 per cent per month as the lender understands their financial situation and constraints.Hence, any time (24x7x365) availability of credit, especially in times of emergency, ispreferred by the borrowers despite the exploitative interest rates. The most crucialchallenge in case of migrant workers is proof of identity. The migrant nature of their jobdoes not allow them to have dependable identities, references or contacts and, therefore,very often, they are denied the financial access due to lack of adequate KYC documents.Besides, the indifference of the urban poor to the formal sources of finance, despite thesebeing less costly, is also attributable to the attitude and mindset of the service providers,which needs to be facilitating and supportive Experience suggests that the financially 158 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013excluded population is more comfortable tapping the informal sources to finance theirneeds, which are much more flexible and convenient.19. The need, therefore, is for the formal financial institutions to adapt their productofferings and delivery platforms to meet the specific needs of the urban poor. The reasonswhy the informal systems are so popular needs to be studied and their strong points needto be incorporated into the practices of the formal service providers to the extent possible.Besides, in order to meet the remittance requirements of migrants, banks should identifymajor inter-state migration corridors in the country and explore partnership with NGOs indifferent sets of origin-destination pairs.Adopt a Functional Cluster Based Approach20. The challenge is to convert poverty into prosperity for the people, while at thesame time, implementing it as a viable business opportunity for banks. For that purpose,we must adopt a functional cluster based approach, well suited to the specific needs ofdifferent segments like Household workers, Construction workers, Weavers, Hawkers,Rickshaw pullers, Auto Drivers, etc. There has to be a multi-pronged, holistic approach thatcould include enhancing financial literacy to build up demand, capacity building andmindset changes of bank staff / BCs, development of need based innovative products,alternate delivery channels through BCs and tie-ups with NGOs to ensure sociallyresponsible delivery of services with consumer protection.21. In fact, product innovation in financial services, keeping in view the life cycle needsof the urban poor, should form the basis of banks strategy to bring these groups into thefinancial system. Banks should innovate to create demand-oriented savings, credit andremittance products that are customized to the lifestyle patterns and income streams ofthe urban poor. Offering micro-saving products, per se, to meet the savings needs of thesegroups, might not be enough. Innovative financial products offering possible investmentopportunities, besides catering to the savings needs, have to be thought of for bringingthe urban poor into the banking system. Insurance offers protection to assets createdunder credit programmes and protects savings from being wiped out by shocks arising outof sickness, death, accidents or asset loss caused by fire, drought, floods and riots. Thesection of the urban poor, who are determined to save regularly, even with their lowearnings, should be provided an investment option that fetches reasonable rate of returnon their savings, without exposing them to significant risks. Mutual funds and pensionschemes for the unorganized sector, customized to the financial needs of the poor, haveto be developed.22. As noted above, in case of rickshaw pullers, the organization of functional clustersinto groups is central to their linkage to the banking system. Formation of JLGs of theurban poor for provision of bank credit, with collective obligations for interest and loanrepayments, is an option. Banks can also explore avenues for individual loans to select JLGmembers who establish a good track record through group borrowings, possess therequisite entrepreneurship skills and who want larger loans for productive purposes.Linking with existing Urban Development Projects : Training and capacity buildingworkshops can be arranged under urban development projects like the Jawaharlal NehruNational Urban Renewal Mission (JNNURM). There will be a possibility of growth of morehomogenous groups required for forming JLG / SHGs in such areas. NGOs can play ameaningful role in this direction.23. Todays seminar must result into concrete actions. As an immediate measure, in 159order to link the urban poor with the formal financial system, it is necessary that the Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013banks take initiatives in close coordination with local NGOs, state government andmunicipal authorities, to launch campaigns to open bank accounts of urban poor in campmode.24. The problem of proof of identity for the migrant workers can be efficiently handledby leveraging technology. Aadhaar cards issued by the UIDAI have the potential to be agame changer. Aadhaar would serve not only as a clean, accessible identification to meetKYC requirements, but would also facilitate Electronic Benefit Transfer of their benefitsand entitlements. The recent KYC relaxations permitted by RBI also allow for Aadhaardocuments to be accepted as both identity and address proof, provided the address givenon the account opening form is the same as the one on the Aadhaar document. Personswith a valid Aadhaar Card would, thus, be able to transact at any bank, at any place.Hence, it is also important to launch a one-time campaign to enroll everyone intoAadhaar, which would remove the major barriers to inclusion of migrant workers.25. Another major area that needs due attention is the task of making the urban poorcreditworthy. We cannot blame the banks alone for lack of credit penetration to thissegment of the society. Banks are into the business of lending, but at the same time, theyalso need to factor in the repayment capacity of the borrower. Unless they firmly believethat the borrower has the ability to build productive assets with the credit received, theywould eschew taking that credit risk. The NGOs have a very crucial role to play in thisregard. They must lead a mission to impart financial education, training and capacitybuilding for this functional group (rickshaw pullers, vegetable vendors, plumbers, masons,etc.) and prepare them to avail of the entire suite of financial products and services i.e.,savings, remittance, insurance and pension from the banking sector, in addition to credit.26. Another linkage for these functional groups with the formal financial systemcould be through an intermediary who could possibly be a management expert. Thisperson could engage with a group of such individuals on a regular basis and professionallymanage their affairs (say for example, arranging for health insurance) for a fee.Accordingly, management institutions could develop basic courses for preparing suchmanagers who truly understand the needs and deeds of these functional groups. All theabove issues would require co-ordinated response from all stakeholders.Way Forward27. There is a need to create greater awareness about the banking services in order tobring the urban poor under the banking network. Proper management of money by theurban poor is critically important for meeting their life cycle as well as investment needs.There is scope to plug non essential expenses and increase their savings behavior. The keystrategies here would be to educate, motivate and encourage. The Reserve Bank of India,as part of its Financial Literacy programme, is issuing a Financial Literacy Guide whichanswers basic questions related to managing money. Responses to certain basic queriessuch as Why to save, how to save, why save in banks, When to borrow, Where to borrowfrom, etc. have been provided in very simple and lucid language, through pictorialrepresentation. This guide can be used by all stakeholders as a standard curriculum foreducating the financially excluded poor people. Along with the Guide, we are also comingout with a Financial Diary with basic messages in pictorial form for distribution to theparticipants in the Financial Literacy Camps so that they can better plan their finances bykeeping record of their income and expenses on a regular basis. The easy-to-understandposters, with appealing pictures, explain the importance of savings and the basic banking 160services. It is time for banks to play a major role in the financial emancipation of the urban Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013poor by conducting financial literacy camps and providing door step user friendly access toservices.28. From the perspective of improving the living standards of the rickshaw pullers, weneed many more initiatives like the Rickshaw Sangh programme. The improvement in thefinancial status of the urban poor, including the rickshaw pullers would be possible only ifit is pursued as an integral part of our financial inclusion initiatives. Providing access tofinance for the rickshaw pullers to own rickshaws should necessarily be at the core ofthese initiatives. However, emphasis need also be on providing a holistic package, whichsupports the rickshaw puller in leveraging his asset (the rickshaw) to pull himself and hisdependents out of poverty. Besides, technology needs to be used to facilitate the task ofrickshaw pulling, so that it becomes less physically demanding.29. An appropriate, customized delivery channel is equally crucial in urban areas.South Africas E-Bank Plan demonstrates how a commercial bank can bundle services forlow-income clients. Its uniqueness lies in its focus on sensitivity to the needs of the basicbanking customer, which led to creation of a new product providing a cost efficientdelivery mechanism. The idea was to offer an integrated combination of product anddelivery features, including user friendly, conveniently located branches, by leveraging ontechnology. E-banks are conveniently located in high-traffic areas in colourful, well-designed, user-friendly kiosks. Instead of relying on traditional advertising methods, E-Bank has used market presence, life insurance and prizes to generate word-of-mouthadvertising. The approach is providing product and delivery features that are valuableenough to make the low-income clients willing to pay ATM transaction fees slightly abovethe market norm and high enough to cover banking costs.Conclusion30. Bringing the urban poor into the mainstream of the financial system can act as animportant gateway for financial inclusion. Rolling out of an innovative financial product,delivered through a user friendly channel, is central to achieving financial inclusion. Thishas to be seamlessly integrated with a strategy to improve the financial literacy of thetargeted groups. Only then will we be able to avoid the problem of low level oftransactions in the newly opened accounts, which we are currently facing in our financialinclusion efforts in the rural areas. As I have always maintained, technology has to be thebulwark around which our financial inclusion efforts have to be developed. Innovative ICTsolutions have to be leveraged to provide door step services of specifically designedproducts at place and time convenient to the targeted population group. Disbursement ofbank loans in association with well meaning NGOs and also involving them in propermonitoring / hand holding of beneficiaries can result in poverty alleviation for a largenumber of people.31. Most importantly, society has to radically change its attitude towards labour andthe people providing us manual services. Every task has its dignity and we must respectthe efforts put in by these groups of people and their contribution in making our livescomfortable and hassle-free. This will encourage us to appreciate the genuine problems ofthese groups and work towards finding solutions for them. As I mentioned at thebeginning, this is required not just for the well-being of these vulnerable groups, but alsofor the stability and sustainability of the social and economic system. I hope, we are,collectively, able to bring about this change in our attitude, which would be a vital firststep in the integration of these marginalized groups. 161 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 201332. I commend the initiative taken by the AIF along with all other stakeholdersincluding the commercial banks / financial institution and NGOs towards the social andeconomic emancipation of the rickshaw pullers through the Rickshaw Sangh programme.The task before us is very challenging considering the large number of rickshaw pullersthat are yet to be touched by the programme. I hope the inputs from the assessmentstudy help in recalibrating the programme towards better meeting the goals set for it.33. I once again thank the AIF for providing me the opportunity to present my views inthis seminar and do hope that the panel discussion to follow would throw up valuableideas on how to take the financial inclusion mission forward, particularly for the urbanpoor. I also congratulate the recipients of the Awards for Outstanding Contribution toFinancial Inclusion, being given today and hope that not only do they continue with theirgood work, but they also succeed in encouraging others to rededicate themselves to thegoal of making our society a truly inclusive one.Thank you.----------------------------------------1 Keynote Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India atthe Annual National Seminar titled Financial Inclusion of Urban Poor conducted by theAmerican India Foundation at New Delhi, on January 28, 2013. Assistance provided bySmt. Sushma Vij in preparation of this address is gratefully acknowledged. 162 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 RBI to issue norms for companies merging with overseas firms via IDRs January 1, 2013The government has allowed Indian companies to merge with firms overseas through theissue of Indian Depositary Receipts (IDRs) and the Reserve Bank of India has been asked toissue detailed guidelines on the process.The Companies Bill 2012, which was passed in the Lok Sabha last month, has permittedlocal firms to merge with foreign companies in "select jurisdictions". The shareholders ofthe merging company can be paid in cash or in IDRs or partly in cash or partly in IDRs.The Bill, which was cleared by law makers in the lower house, will now have to be clearedby the upper house. Lawyers and consultants say the move would facilitate cross bordermergers, open options to restructure firms and overseas listing through reverse merger.But a final approval will depend on RBI guidelines and rules in foreign countries."The move would facilitate cross border listing of entities with Indian assets and exits orliquidity to shareholders and investors," says Pankaj Jain, a lawyer with BMR Advisors,which specializes in M&A.The older Companies Act, 1956 allowed only the merger of a foreign company into anIndian firm. In 2003, Moschip Semi Conductors arranged the merger of California-basedVerasity with itself under Section 391-394 of the Companies Act in 2003 after the AndhraPradesh high court ruled in its favour."The law did not permit the same freedom to Indian companies. The change, if reflected inthe final version of the Bill now expected to be passed in the budget session of parliamentin February, will allow Indian companies to merge with foreign firms, who will issue IDRsto shareholders of the domestic firm and which will be listed in the local market," saysPavan Kumar Vijay, MD of Delhi-based corporate consultancy group CorporateProfessionals.But some experts say such provisions also may not be a game changer. "There may not bea large number of companies waiting for this opportunity, says Avinash Gupta, nationalleader at Deloitte financial service, a tax and audit firm. "It may take some time before thistakes off," he added. "Further, one needs to see how much headroom is provided by theRBI, which is worried about the flow of foreign money in the country, he added.Tata Motors, Indias largest truck maker and its British marque car maker Jaguar LandRover and Suzlon with its German Company RE Power are some of the companies whichhave operations both in India and abroad."The capital account convertibility should not be an issue in these cases since Indian lawalready permits a foreign company to purchase upto the entire shareholding in an Indiancompany in most sectors," says RS Loona, former SEBI executive director and nowmanaging partner at law firm Alliance Corporate Lawyers. "It comes into play only whenyou make the capital freely transferable," he added.Source:http://economictimes.indiatimes.com/news/economy/policy/companies-can-merge-with-foreign-firms-via-idrs-rbi-to-issue-norms/articleshow/17836856.cms 163 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 RBI cautions banks charging high prices on products January 1, 2013RBI Deputy Governor KC Chakrabarty asks banks not to charge high pricesCautioning banks against charging high prices on products offered to customers, ReserveBank Deputy Governor KC Chakrabarty said on Sunday a new set of guidelines would beannounced during the coming Ombudsman Conference in Mumbai."I am telling you that if you believe that the pricing has become exploratory then we willintervene. We have intervened in the case of micro-finance institutions. What I am sayingis, discriminatory pricing (on products offered to customers) should not be there. Pricingshould be non-discriminatory," he said.During the Ombudsman Conference, new guidelines would be announced. "Some newguidelines will come on how it ( RBI) can be more stringent in pricing the products tocustomers of banks," he said.Observing that banks charge high interest rates for educational loans compared to homeloans, he said "I am only raising a question why it cannot be reduced."Source:http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/rbi-deputy-governor-kc-chakrabarty-asks-banks-not-to-charge-high-prices/articleshow/17828765.cms RBI to address long-pending grievance of MSME sector January 1, 2013RBI to compile list of MSMEs lacking access to bank creditIn a bid to address the long-pending grievance of the micro, small and medium enterprise(MSME) sector that it lacks sufficient access to bank credit, the Reserve Bank of India ( RBI)plans to join hands with industry associations to prepare a database of units that do nothave such access.Banks should cater to the MSME sector for sustainable growth, said N S Viswanathan,southern regional director of RBI, adding that it is the best medium for achieving financialinclusion. Credit penetration for this segment is only seven per cent, with theoverwhelming majority still depending on money lenders.In Tamil Nadu, a state with a large concentration of MSMEs, the RBI is talking to variousMSME associations to find out how many of their members have availed themselves ofbank credit. This is the first step, and the next will be to connect bankers and units,Viswanathan said. He agreed that banks see MSMEs as high-risk borrowers. When anaccount turns sticky, banks focus only on recovery; instead, they should look at how torevive units, he said.While welcoming the RBIs move, the president of the Tirupur Exporters Association (TEA),A Sakthivel, said, "The government keeps saying that a certain portion of bank creditshould be kept aside for MSMEs, but there is no monitoring. They should have amechanism to monitor whether the target is achieved or not, and stringent action shouldbe taken against banks which do not meet targets." 164 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Tirupur-based units export knitwear worth around Rs.12,500 crore annually and needRs.1,500-2,000 crore of bank credit to support their businesses, said Sakthivel.Recently, a senior official of the Federation of Indian Micro & Medium Enterprises (Fisme)was quoted as saying banks are very subjective in lending to MSMEs and do not maintainrecords of loan applications. However, banks blame MSMEs for not keeping their booksclean and for defaulting on loan repayments.While denying allegations that banks are not meeting targets, the chairman of a publicsector bank noted that credit flow to the MSME sector rose by nine per cent to Rs.7.12 lakhcrore in 2011-12, from Rs.6.53 lakh crore in 2010-11.Commenting on banks practice of asking for collateral, he said, "At the end of the day, wehave to get back what we have disbursed, since it is public money. Besides, most MSMEsdo not have proper accounts, or collateral, or even a concrete plan."Agriculture and MSMEs used up only a fifth of bank credit, but accounted for 36 per centof banks non-performing loans, according to data from the RBIs latest Financial StabilityReport.Around 4.8 per cent of MSME loans were non-performing as of March 2012, according tothe report. The proportion rose by 1.3 percentage points over the past year.Despite all this, the government continues with all measures to support the sector,because it recognises that this sector cannot be neglected, said the bank chairman. Forinstance, the government recently decided to allocate a corpus of Rs.7,000 crore corpus toSidbi for the refinancing and restructuring of bank credit to SMEs.The finance ministry is reportedly planning to streamline lending norms for the SMEsector and has asked state-owned banks to come out with an uniform loan applicationform for loans of up to Rs.25 lakh. The government has also asked banks to set up anelectronic loan tracking system, which would enable prospective SME borrowers to checkthe status of their loan applications. This is expected to reduce the discretion available tobank officers in granting loans to SMEs.Source:http://www.business-standard.com/india/news/rbi-to-compile-listmsmes-lacking-access-to-bank-credit/497272/ Foreign investments should be allowed into Alternative Investment Funds : approval seeked by Sebi January 2, 2013Sebi seeks approval for foreign funds into alternative investment fundsMarket regulator Sebi has asked the government to allow foreign investments intoalternative investment funds and also boost downstream investments by offshoreentities under the foreign direct investment policy framework.Sebi has written to the finance ministry as well as the department of industrial policy andpromotion under the commerce ministry, seeking clarity on the FDI policy. "The issue isnow being examined," a government official told ET.Though the FDI policy guidelines specify the norms for venture capital funds, the AIFregime has superseded it with substantial changes. 165 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The market regulator has sought exemption for the minimum sponsor commitment inthe AIF from the FDI policy norms, the official said, adding that the matter will have to bedealt with in a holistic manner.The regulator had notified in May, 2012 the guidelines for AIFs, a new class of marketintermediaries that are essentially funds established or incorporated in India for thepurpose of pooling in capital from Indian and foreign investors for further investments.Sebi has also allowed promoters of listed companies to offload up to 10% of equity toregistered AIFs to attain minimum 25% public holding.The regulator has so far registered 12 AIFs, but investors are still unclear about the policyon FDI.Experts say policymakers need to make it clear whether AIFs were also intended asvehicles to attract foreign investment."There is no clarity on how the AIF regime fits in with the existing FDI regime...Also, itwould be good to understand if the intent of the AIF is to facilitate offshore entities tohave more options and flexibility in their India investment strategies or whether that isonly incidental," said Shinjini Kumar, director at global consultancy firm PwC.Clarity on the issue is expected to facilitate quick decision-making by global investors."Several investors have approached us but are awaiting clarity on issues such as FDI," saidJyoti Rai, head of business development at SBI-SocGen Global Custodial Service.Some experts, however, say that the provision valid for venture capital funds in the FDIpolicy should continue and there is no need for any clarification."This is in view of the section 8 of The General Clauses Act, which says that references torepealed law (in this case foreign investment in registered VC funds under VCF regulationswhich fell under the automatic route) would automatically be replaced by the newenactment relating to category I alternative investment funds," said Sandeep Parekh,founder of Finsec Law Advisors and a former executive director of Sebi.As per Sebi guidelines, AIFs can operate broadly under three categories. The first categorycomprises funds, such as social venture funds and infrastructure funds, which getincentives from the government. The second category includes private equity, debt fundsor fund of funds, while the third category includes funds such as hedge funds.Source:http://economictimes.indiatimes.com/news/economy/policy/sebi-seeks-approval-for-foreign-funds-into-alternative-investment-funds/articleshow/17848790.cms Existing rules on insider trading to be synced with the guidelines of Companies Bill : Sebi January 2, 2013Sebi to revise rules on insider trading; to synchronizenorms with the guidelines of Companies BillSecurities market regulator plans to revise the rules on insider trading and front-running,as it gets down to synchronizing the rules with those set down by the government in theCompanies Bill, which was approved by the LokSabha a fortnight ago.The Securities and Exchange Board of India (Sebi) has its own set of rules on insidertrading and front-running, but with the Companies Bill also incorporating provisions 166 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013barring forward dealings in securities by a director of a company or key managers such asthe CEO, MD, chief financial officer or full-time directors, and buying or selling sharesbased on price sensitive information which is not public, the regulator wants to carry outthe necessary changes too."The minute the Companies Bill is approved, we will revise the insider tradingregulations," a senior official who spoke on condition that he will not be named, said. Thenew Companies Bill was approved by the Lok Sabha last month and will now need theassent of the Upper House of Parliament or the Rajya Sabha. These revisions andmeasures to boost the local bond market are high on the agenda of the regulator thisyear, the official said.Sebi plans to build on several steps it had taken in 2012, such as changes in enforcementaction -- a transparent set of rules for consent orders or the process of settling claimsthrough negotiations and by paying a fine -- introduction of the pre-market call auction,which has helped curb volatility on the opening day, putting pressure on merchantbankers and issuers on pricing offers competitively, leading to greater discipline onpricing, allowing electronic IPOs and regulation of stock exchanges.According to officials in stock exchanges and senior bankers, the newly introducedwindow for Offer for Sale or OFS has helped revive the market for primary marketofferings. With the regulator staying firm on not easing the deadline of June 2013 forlisted companies to ensure a public holding of at least 25%, 20 companies have compliedwith this rule.With the regulator holding talks with over 100 companies across the country, more issuesare set to hit the market in the next few months."For India to be counted as a credible market, corporate governance has to be of a highorder. Going forward, it has to be a signal to the outside world that there has to be morefloating stock in the Indian markets" he said.Although private corporates are the ones who are now in the process of divesting sharesto meet the 25% norm, state-run companies too are expected to follow suit, with thefinance ministry indicating its support after the regulator took up the issue with thefinance minister and the cabinet secretary.The last few primary market offerings have done well, thanks to better pricing. Sebichairman UK Sinha has been very critical of the role of merchant bankers, and at a recentfunction compared them to match makers in the matrimonial business. Last year, theregulator made it mandatory for merchant bankers to make available to investors theirtrack record, besides evolving a code of conduct for investment bankers.The official said that one of the problems on the enforcement front was lack ofconsistency and transparency. With the introduction of a new set of rules for calculatingsettlement charges, over the past seven months, Sebi has rejected 150 applicationsincluding those from some top corporates for settling cases of violation of securitiesmarket regulations, compared with 60-70 cases earlier, he said.A consolidation of stock exchanges also appears to be under way, with three bourses --Hyderabad, Coimbatore and Saurashtra - getting approval for winding up, in line with therules introduced in 2012. The guidelines introduced last year for governance of stockexchanges, based on the Bimal Jalan committee recommendations, have led to a couple ofstock exchanges led by the Bombay Stock Exchange, beginning the process for listing."What we want to do is to take measures quietly, without making big ticket 167announcements, and ensure more accountability and transparency in the organisation, Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013"the official said. Sebi has also started consultations with professionals in the bondmarket to consider measures to boost trading.Source:http://economictimes.indiatimes.com/markets/regulation/sebi-to-revise-rules-on-insider-trading-to-synchronize-norms-with-the-guidelines-of-companies-bill/articleshow/17851059.cms Post Bank of India to be established soon January 2, 2013Post Bank of India set to get shapeThe Department of Posts is likely to finalise plans for setting up the Post Bank of Indiasoon to provide full banking services primarily to the rural poor who still depend oninformal credit sources.A detailed project report (DPR) is expected to be in place in a few weeks that would bringclarity on the organisational structure of the proposed Post Bank of India, besidesclarifying relationship between the Post Bank of India and the Post Office Savings Bank,the Department of Posts has informed the Standing Committee on InformationTechnology in a written statement.In July 2012, the Department of Posts has appointed an external consultant to executethe DPR. The assignment was given to one of the five shortlisted firms -- AccentureServices, Boston Consulting Group, Ernst & Young, KPMG Advisory Services and McKinsey& Co. The DPR was scheduled to be completed by December 31, 2012.According to a report by the Standing Committee on Information Technology, theproposed Post Bank of India will be a profit making entity that would essentially help theDepartment of Posts in reducing its deficit.The Standing Committee, in its report, has also suggested that the Post Bank of Indiashould also provide ATM services in remote areas, besides taking core-banking facilities tothe rural areas.The Committee also asked the Department of Posts that it should establish the Post Bankof India within the 12th Five-Year Plan period.Source:http://www.business-standard.com/india/news/post-bankindia-set-to-get-shape/201199/on RBI likely to finalise norms for NBFCs this month January 3, 2013RBI may meet NBFCs this month for finalisation of normsThe Reserve Bank is likely to meet the representatives of non-banking finance companies(NBFC) this month for consultation before finalising the guidelines for the sector."The central bank is likely to hold a couple of meetings in January before finalising theguidelines with regard to NBFCs," an industry source said.The apex bank had released the final draft guidelines on NBFCs, based on therecommendations of Usha Thorat committee report, last month.The report proposes revision of NPA recognition norm to 90 days (against the existing 180 168days), along with adoption of higher provisioning requirements for NPAs. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013It also proposes 10% capital adequacy ratio (CAR) for most of the NBFCs and increase inrisk weights for some other asset classes.Referring to the guidelines, another source in the NBFC industry said the sector hasalready given representations."We have already given our feedback to the central bank and pointed out the difficultieswith regard to the treatment of NBFCs on par with banks in some of the regulations," thesource said.Source:http://www.business-standard.com/india/news/rbi-may-meet-nbfcs-this-month-for-finalisationnorms/201351/on Listed Companies should Disclose data as per clause 36 of the Listing Agreement : Sebi January 4, 2013Disclose data to exchanges first : Sebi to India IncThe Securities and Exchange Board of India ( Sebi) on Thursday asked listed companies todisclose their monthly sales, turnover and production figures to stock exchanges, beforesharing these with trade bodies and industry associations.Sebi believes such data, which have a bearing on stock prices, should first be disseminatedto stock exchanges to ensure all investors have uniform access to these. "All the events ormaterial information which would have a bearing on the performance / operations of thecompany, as well as price-sensitive information, shall first be disseminated to the stockexchanges, as required under Clause 36 of the Listing Agreement," Sebi said in a circular.Experts said submission of monthly data on sales and production to the exchanges wouldbenefit shareholders, as this would provide a level playing field. It is a common practiceamong companies in the automobile, cement and telecom spaces to submit their monthlysales figures to their respective industry bodies. For instance, automobile companiesprovide their monthly sales data to the Society of Indian Automobile Manufacturers onthe first day of every month. Cement companies, too, provide monthly sales figures to theCement Manufacturers Association. A few companies also upload relevant data on theirwebsites.Clause 36 of the Listing Agreement mandates companies to promptly disclose price-sensitive information and material events to exchanges. "The issuer will intimate thestock exchange on which the company is listed immediately of events such as strikes,lockouts, closure on account of power cuts, etc, and all events which will have a bearingon the performance / operations of the company, as well as price-sensitive information,both at the time of occurrence of the event and subsequently, after the cessation of theevent in order to enable the security holders and the public to appraise the position of theissuer and to avoid the establishment of a false market in its securities," states Clause 36of the Listing Agreement.Sebi also advised stock exchanges to take into account these requirements and bringthese to the notice of listed companies.Source:http://www.business-standard.com/india/news/disclose-data-to-exchanges-first-sebi-to-india-inc/497681/ 169 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 SEBI proposes tougher norms for corporate governance January 7, 2013Sebi moots corporate governance norms overhaul for listed cosMarket regulator Sebi proposed wide-ranging overhaul of corporate governance norms forlisted companies, through measures like checks against unjustifiable CEO pay, greaterpowers to minority shareholders, an orderly succession planning and hefty penalties fornon-compliance.Besides, the regulator has also proposed a new concept of Corporate Governance Ratingby independent agencies to monitor the level of compliance by the listed companies andregular inspection by Sebi and stock exchanges.In a discussion paper for proposed changes in the corporate governance norms for listedfirms, Sebi has also proposed measures for a greater oversight by and on independentdirectors, as well as greater alignment of CEO salaries with the performance and goals ofthe company.Sebi said "that, on average, the remuneration paid to CEOs in certain Indian companies arefar higher than the remuneration received by their foreign counterparts and there is nojustification available to that effect."The Securities and Exchange Board of India (Sebi) has also proposed mandatory disclosureby the listed companies of ratio of remuneration paid to the each of their directors andtheir median staff salary.Such a disclosure has already been proposed in the Companies Bill 2012 for all publiccompanies, but Sebi has proposed such a provision for listed companies in advance, alongwith a number of other Corporate Governance measures contained in the proposed Billthat is awaiting final Parliamentary approval.Sebi said that it is seeking to adopt better global practices through these proposalswithout increasing the cost of compliances by a huge margin."... at the same time, it is necessary to bring back the confidence of the investors back tothe capital market, for channelising savings into investment, which is the need of thehour," Sebi said.The regulator also said the current regulations provide for actions like delisting orsuspension of a companys shares, adjudication for levy of monetary penalty, prosecutionand debarring of promoters and directors from the markets in case of non-compliance.However, delisting or suspension is generally not considered an investor friendly actionand therefore, cannot be resorted to as a matter of routine and can be used only in casesof extreme / repetitive non-compliance."Prosecution, on the other hand, is a costly and time-consuming process," Sebi said, whileproposing measures like companies being asked to get Corporate Governance rating,inspection of compliance by stock exchanges, Sebi or any other agency.It has also proposed imposing penalties on the company, its directors, compliance officerand key managerial persons for non-compliance "either in spirit or letter", and sought toconvert the provisions of Listing Agreement into regulations for better enforcement.Comments on the paper have been invited till January 31.Source: http://economictimes.indiatimes.com/markets/regulation/sebi-moots-corporate-governance-norms-overhaul-for-listed-cos/articleshow/17886509.cms 170 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Working group set up to resolve consumer complaints : RBI January 7, 2013RBI sets up panel to review grievance redress mechanismThe Reserve Bank of India has set-up a working group to review and make improvementsin the grievance redress mechanism for bank customers. "A Working Group has beenconstituted in the Reserve Bank of India to review, update, and revise the BankingOmbudsman Scheme, 2006," the central bank said in a statement.In financial year 2011-12, the banking ombudsmans office of the RBI received 72,889complaints (up from 71,274 complaints in the year before). It disposed off 94 per cent ofthe customer complaints in the same year, RBI said in its annual report of the BankingOmbudsman Scheme 2011-12.About one-fourth of the total customer complaints were about banks failure to meetcommitments and non-observance of fair practices code.The Banking Ombudsman received 14,492 card related complaints in the reporting year.Unsolicited cards, charging of annual fee in spite of being offered free card formed thebasis of some of the complaints against the banks.Interestingly, last month, the central bank ordered banks to stop dispatching a card to thecustomer unless solicited.Presently, there are fifteen Banking Ombudsmen with specific jurisdiction covering the 29States and seven Union Territories in India.Source : http://www.thehindubusinessline.com/industry-and-economy/banking/rbi-sets-up-panel-to-review-grievance-redress-mechanism/article4276929.ece New rules expected for taking foreign tax credit from 2013-14 January 7, 2013Taking foreign tax credit set to become easier from 2013-14Good news for all individuals and companies facing difficulties in taking legitimate taxcredits in India for the tax paid in other countries : The hassles in taking credit from theIncome-Tax Department for the tax payments on their income in other countries is set tosubside.The Central Board of Direct Taxes ( CBDT) is drafting rules for foreign tax credit (FTC), tobring in clarity in its administration.The rules are expected to come into force from April 1. At present, there are no set rulesfor foreign tax credit, making it difficult for assessees to decide on credit claims and leadsto either undue harassment for the taxpayers or litigation. The guiding principle to decideon FTC is the double tax avoidance agreement (DTAA) with the country in which tax hasbeen paid, for which the credit has to be taken in India. If the tax payment has been madein a country with which India does not have a DTAA, the Income-Tax Act provisions are thedeciding factors.Girish Vanvari, co-situations. The question is how to compute taxes in cases like dividend, distribution, etc,in which tax rates are different in different countries". 171 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Vanvari stresses as the business is becoming more and more international, it is requiredthere is clarity in the rules. "Issues like foreign exchange variations and difference in thetiming of filing tax returns should also be tackled," he says.To answer these concerns, CBDT has set up a committee for drafting the rules, which hasto give its report by February 28.The committee is studying the system of FTC in India and the best international practicesassociated with FTC rules. It will suggest draft rules on the methods for computing theamount of credit, manner of claiming credit and other particulars necessary for claimingrelief or avoidance of double taxation.As the FTC rules are critical for professionals and companies in information technologyand other sectors engaged in other countries, the panel is taking inputs from thesesegments and also tax experts as directed by CBDT.The suggestions have been asked from associations such as Nasscom, the Federation ofIndian Chambers of Commerce and Industry, the Confederation of Indian Industry, theAssociated Chambers of Commerce and Industry of India, and various others associatedwith taxation.The Direct Taxes Code (DTC) seeks to streamline the system and has proposed FTC rulesunder section 207. According to tax experts, the government can bring in FTC rules, evenwithout DTC, whenever it wants.Clause 207 of the DTC Bill, 2010, is associated with foreign tax credit allowable to anassessee, being a resident in India in any financial year on income which is taxed in Indiaas well as outside India.The clause states that where the assessee is required to pay Indian income-tax in respectof an income that has been taxed in any specified territory or other country with whichIndia has a DTAA, the foreign tax credit will be allowed in accordance with the agreement.Where there is no such agreement, the tax credit will be determined at the Indian rate oftax or the rate of tax of the other country, whichever is lower.The credit in either case will not exceed the Indian income-tax payable in respect ofincome which is taxed outside India and the Indian income-tax payable on total income ofthe assessee. It also provides that CBDT, for the relief or avoidance of double taxation,prescribes the method for computing the amount of credit, manner of claiming credit andother particulars.Source : http://www.business-standard.com/india/news/taking-foreign-tax-credit-set-to-become-easier2013-14/498007/ RBI relaxes overseas borrowing limit for NBFC- IFCs January 8, 2013ECB limit raised for infrastructure NBFCsThe Reserve Bank of India has raised the external commercial borrowing (ECB) limit fornon-banking finance companies (NBFCs) classified as infrastructure finance companies(IFCs).The limit under the automatic route has been enhanced from 50 per cent to 75 per cent ofowned funds, including outstanding ECBs.Such companies desirous of availing ECBs beyond 75 per cent of their owned funds would 172require the RBIs approval and will, therefore, be considered under the approval route. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013According to the RBI, the permitted end use of ECBs raised by such companies should befor lending to the infrastructure sector, as defined under the ECB policy. These companiesshould also fully hedge their currency risk.At least three-fourths of an NBFC-IFCs total assets are infrastructure loans; it has netowned funds of Rs.300 crore or above; has minimum credit rating A or equivalent from anaccredited rating agency; and has a capital-to-risk-weighted-assets ratio of 15 per cent(with a minimum tier-I capital of 10 per cent).The move to increase the ECB limit comes at a time when the country requires $1 trillioninvestment in infrastructure in the 12{+t}{+h} Five-Year Plan (2012-2017).Source:http://www.thehindubusinessline.com/industry-and-economy/banking/ecb-limit-raised-for-infrastructure-nbfcs/article4283635.ece Tax recovery norms get stricter from 01-01-2013 January 8, 2013Government tightens tax recovery normsThe Central Board of Excise and Customs (CBEC) has sought to initiate recoveryproceedings on custom, excise and service tax orders raised if the tax evader is unable toobtain a stay within 30 days.After 30 days of filing of an appeal together with a stay application by the taxpayer withthe Commissioner (Appeals) or the Customs, Excise and Service Tax Tribunal (CESTAT), theindirect tax authorities will move to recover the demands raised, even if the stayapplication has not been heard. In case of appeals before the courts, even this 30-dayperiod is not available and recovery will be initiated immediately, according to a CBECcircular issued last week.Practically, it is difficult for taxpayers to obtain a stay order within such a short period. Theirony is that the law itself permits the appellate authorities, both the Commissioner(Appeals) and the higher authority CESTAT to hear a stay petition within six months fromthe date of filing a stay appeal. There are various other situations outlined in this circular,but the essence in each case is the same-it all boils down to expediting recoveryproceedings.For indirect tax matters, the taxpayer when filing a litigation appeal in parallel also files astay application. Prior to the issue of this circular, dated January 1, 2013, which isaddressed to the chief commissioners, the indirect tax authorities did not resort tocoercive action to recover the demand raised, till the stay application was heard. Thiscircular has also rescinded seven earlier circulars, some of which were more beneficial tothe taxpayer.This circular will not only impact India Inc-both large and small entities-but will alsoimpact service providers and professionals that pay service tax. Bipin Sapra, partner, Ernst& Young, said : "While this circular refers specifically to excise, the procedure set outwould be applicable to service tax matters also." Today almost all services, apart from 17exempt heads under the negative list, such as school educational services, publictransport, health care, services provided by an individual advocate to other individuals, toname a few, are covered under the service tax net and taxed at 12.36%. Ramifications ofthis circular are wide, as the cash flow situation now arising owing to prompt payment of 173service tax demand, may cascade down to consumers through higher pricing. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Sunil Gabhawalla, a chartered accountant, said : "The circular is draconian anddetrimental to the interests of taxpayers. Taxpayers will have to follow up aggressively toensure they get a stay within 30 days.However, if for instance, the Commissioner (Appeals) or the Tribunal bench does not hearthe matter due to huge pendency or non-availability of bench members, it may be difficultto obtain the stay. Typically, even the government department representatives ask for analternative date for hearing of the stay application which results in delays."A government official said : "This circular was issued after a Supreme Court order. TheSupreme Court in the case of Krishna Sales had observed : As it is well known, mere filingof appeal does not operate as a stay or suspension of the order appealed against." He alsoadded that taxpayers delay hearing proceedings to buy time to pay the demands. Anadded procedural problem arises for taxpayers."Once a stay is obtained, refund will have to be given. However, obtaining a refund is timeconsuming. The circular will cause an added administrative burden to both taxpayers andtax authorities," added Sapra.During the first half of the current financial year 2012-13, indirect tax collections hadarisen at a low rate of 15.6% to Rs.2.17 lakh crore only. The government has fixed thetarget of indirect tax collection, comprising customs, excise and service tax, at Rs.5.05 lakhcrore for the current fiscal.Source:http://timesofindia.indiatimes.com/business/india-business/Government-tightens-tax-recovery-norms/articleshow/17933435.cms FinMin likely to discuss the controversial tax rules in parliament next month January 8, 2013Govt seeking to amend controversial tax rules next monthThe government is likely to approach Parliament next month to water down retrospectivetax rules that damaged investor confidence, two finance ministry officials said onMonday, a move that may help settle British-based Vodafone Group Plcs long-runnning$2 billion tax dispute.Vodafone, the largest overseas corporate investor in India, has repeatedly clashed withIndian authorities over taxes since it bought Hutchison Whampoas local mobile businessin 2007.The government was heavily criticised by the corporate sector for introducing the toughtax rules last year at a time India was suffering a sharp economic slowdown and trying toencourage investment. Finance Minister P Chidambaram has for several months beenconsidering recommendations by a government panel that said past mergers andacquisitions should not be taxed.Vodafone, the worlds biggest mobile operator by revenue, said in a statement last weekthat it had received a reminder from Indian tax authorities on the disputed tax dues,adding it believed that no tax was payable on the deal."[The] Finance Minister is likely to approach the Parliament next month on theretrospective issue," said a senior finance ministry official, who asked not to be identifiedbecause of the sensitivity of the issue. 174 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013He declined to say whether the government was considering a waiver of the entire tax billor cancelling interest and penalty charges on the original tax demand.However, the officials said Chidambaram was likely to introduce amendments in the 2013Finance Bill to revise the amendments that were introduced last year along with thebudget.Then Finance Minister Pranab Mukherjee introduced an amendment enabling authoritiesto make retrospective tax claims on long-concluded corporate deals after the SupremeCourt had quashed the governments tax demand on Vodafone.A committee headed by the finance ministers economic adviser, Parthasarathi Shome,has recommended that past mergers and acquisitions should not be taxed, or thegovernment should waive both interest and penalty.The officials said Finance Minister P Chidambaram was looking at the recommendationsto work out a solution to the Vodafone dispute by considering its impact on revenuereceipts as well as investor sentiment.They said the government needed parliaments nod to provide tax relief to the company,as this would also affect tax demands amounting to at least $5.5 billion for other suchdeals.One official said the letter was just a reminder to Vodafone to pay the tax following lastyears amendment in the Act. "It is not a fresh tax notice," the official said, adding theparliament could provide relief.The official said Vodafone had also expressed willingness to hold talks, and a solutioncould soon be reached.Last April, Vodafone threatened the Indian government with arbitration proceedings in itsfight over the retrospective tax proposal.Source:http://www.business-standard.com/india/news/govt-seeking-to-amend-controversial-tax-rules-next-month/201870/on Sebi is likely to propose stringent public shareholding norms January 9, 2013Sebi for stricter public shareholding normsThe Securities and Exchange Board of India ( Sebi) might discuss the penalty it plans toimpose on companies failing to meet the minimum public shareholding norms andfurther changes to the offer for sale (OFS) norms, among other matters, when its boardmeets on January 18.Freezing of voting rights of promoters, expulsion of the company from the derivativesegment, shifting of its scrip to trade-to-trade category, and debarment of the promotersfrom the capital markets are some of the likely actions the securities market regulator isconsidering against companies failing to achieve at least 25 per cent public holding beforeJune, according to people with direct knowledge of the matter."The regulator is looking at finding a way where only the promoters of non-compliantcompanies will be impacted and the interest of minority shareholders in the company willbe safeguarded," said a person with knowledge of the matter, who did not wish to beidentified. 175 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013There are about 125 private companies with promoters holding more than 75 per cent. Atattain the required public holding.In the past couple of months, Sebi has had one-on-one meetings with some of thesecompanies across various cities, where the regulator sought to clear doubts of companiesand also cautioned them on the likely action for non-compliance.At the board meeting, Sebi is likely to tweak the OFS framework for a second time, to bringmore transparency in the bidding process. According to sources, the regulator could directstock exchanges to provide cumulative bids and indicative prices on an hourly basis.Currently, the indicative pricing is displayed less than an hour before the closing of bids.OFS, the institutional placement programme (IPP), rights issues and bonus shares are theroutes allowed by Sebi to help companies increase public float. Of these, OFS has emergedas the most popular tool used by companies to achieve public shareholding target.Review of the OFS framework is aimed at ironing out any issues in this method and toencourage companies to use this method to pare promoter holding.Sebi is also likely to consider further reducing the margin requirement for institutionalinvestors under OFS. A number of market participants, including the government, haverequested the regulator to do away with the requirement due to foreign currency risksand uncertainty of allotment for institutional investors.According to sources, Sebi is not too happy about completely doing away with the marginrequirement, as it believes this could increase the risks. However, the regulator could bringthe requirement at par with the secondary market, though exchanges will have to ensurethat trades go through properly."There is no end to such demands. However, if the situation so demands, we will look attiming, margins and any other changes. I am sure nobody will be happy if the marginrequirements are removed and the trades are not honoured," Sebi chairman U K Sinha hadsaid at an event last month.Earlier, the margin requirement for OFS was 100 per cent but Sebi in June 2012 made it adhoc, to be decided by the stock exchanges.Source:http://www.business-standard.com/india/news/sebi-for-stricter-public-shareholding-norms/498187/RBI might consider bringing down G-Secs to be held under HTM January 10, 2013RBI plans to trim banks government bond holdings to ease liquidityTo increase liquidity, the Reserve Bank may reduce the quantum of government securitiesto be held by banks under the held to maturity (HTM) category, deputy governor H RKhan said."We will consider reducing the G-secs under the HTM category to increase liquidity in non-disruptive manner," Khan told a capital markets meet here.Banks statutory bond holdings (SLR) are classified into various categories like HTM,available for sale and held for trading.At present the HTM cap is set at 25 per cent but it has been traditionally aligned with abanks statutory liquidity ratio (SLR), which is the portion of deposits that a bank must 176invest in government bonds, currently pegged at 23 per cent. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013RBI had said in October it was looking into a recommendation from a central bankcommittee to cut the HTM ceiling.On prevailing high liquidity deficit, the deputy governor said the governments cashbalance is quite high and that is the main reason for the liquidity crunch. But he was quickto add that if the liquidity deficit persists, then RBI will conduct OMOs.Khan also said the RBI is considering carving out a portion of the SLR for liquidity purposes,although he did not provide further details.On giving tax incentives to mutual fund instruments, Khan said the tax treatment on debtfund is unequal as compared to equity funds. "So, the government is considering offeringtax sops to these kinds of instruments. The proposal is being considered by thegovernment," he said.On the proposal for consolidating the government bonds market, he said, "We are indiscussions with the government, this will happen in the next two to three years. If you doconsolidation, it will increase the liquidity.Source : http://economictimes.indiatimes.com/news/economy/finance/rbi-plans-to-trim-banks-government-bond-holdings-to-ease-liquidity/articleshow/17959341.cms Sebi notifies regulations for setting up a SRO to monitor MF distributors January 10, 2013Sebi notifies regulations on SRO for MF distributorsIn a move to regulate mutual fund distribution business, Sebi said it has notifiedregulations to set up a Self Regulatory Organisation (SRO) to monitor distributors ofmutual fund and portfolio management products."...The Securities and Exchange Board of India (Sebi) hereby appoints the date of thisnotification as the date on which the regulations shall come into force in relation todistributors engaged by asset management companies of mutual funds and distributorsengaged by portfolio managers," the regulator said in its notification dated January 8.In August, last year, Sebi in its board meeting had approved the proposal made by itsMutual Fund Advisory Committee (MFAC), to set up an SRO to regulate the Mutual Funddistribution business.The decisions followed concerns about mutual fund distributors in India not beingregulated and there having various complaints against them for mis-selling of products tothe investors.Presently, the distributors need to register with Association of Mutual Funds in India(AMFI) and their registration can be cancelled by AMFI for violation of a prescribed Code ofConduct or for any other malafide practice.Source : http://www.business-standard.com/india/news/sebi-notifies-regulationssro-for-mf-distributors/202109/on 177 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 New set of guidelines for consent order mechanism : Sebi January 11, 2013Sebi tweaks consent mechanism normsMarket regulator Sebi on Wednesday said it has framed a new set of guidelines forconsent order mechanism and warned that any corporate house, however big it may be,caught for serious misconducts will be severely dealt with as the market is not a "casino"."We have come out with a new set of guidelines for the consent mechanism and if anycorporates or individuals, however powerful they may be, are found going against thatpolicy, stern action will be taken against them," Securities and Exchange Board of India(Sebi) chairman U K Sinha told reporters here.He was answering media queries on what action will be taken against Reliance andSahara Groups for their alleged market misconduct. However, Sinha did not name any ofthese companies, nor did he reveal the changes in the new consent mechanism, but said ifany corporate or individual flouts the regulatory norms stern action will be taken againstthem according to the law.Consent mechanism refers to settlement of a case dealing with alleged flouting ofsecurities laws without the individual or company involved admitting or denying guilt.The alleged party gets absolved of the charges by paying a mutually agreed penalty to theSebi."We are taking all possible measures to ensure that nobody is able to avoid the rules ofthe game, especially on a continuous basis, to harm the interests of the individual andinstitutional investors," he warned."Sebi is continuously taking measures to improve retail investors confidence in the equitymarkets ... the market is not a casino where one can do anything and get away with it,"Sinha said.Sinha, addressing a capital markets summit here, warned companies of serious punitiveactions against market misconduct. "Any corporate house, irrespective of its size, notadhering to the regulatory norms and is caught for serious market misconduct will beseverely dealt with." Stressing that the domestic market is well-regulated, he saidinvestors should not worry as Sebi has the necessary mechanisms to take care of anymanipulation.Source:http://timesofindia.indiatimes.com/business/india-business/Sebi-tweaks-consent-mechanism-norms/articleshow/17962470.cms Investors should not fall for fraud regulatory calls : Sebi January 11, 2013Sebi warns against fraud regulatory calls to investorsCapital markets regulator Sebi cautioned the investors and general public againstfraudulent calls being made in the name of regulatory officials to sell financial products orto offer investment advice.Amid rising instances of fraudsters posing as regulatory officials to lure unsuspecting 178investors into their investment schemes, similar warnings have been issued in the recent Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013past by other financial regulators, RBI (Reserve Bank of India) and IRDA (InsuranceRegulatory and Development Authority).In its public notice issued, the Securities and Exchange Board of India (Sebi) said that "Sebineither offers any investment advice or recommend any investment products / schemesnor seeks any personal information of investors for this purpose.""It is observed from some recent newspaper reports that fraudulent telephone calls arebeing made to individuals / investors in the name of the regulatory officials giving adviceon financial products," Sebi said."In this regard, the attention of the public is drawn to the fact that If any prospectiveinvestor is contacted by any person purporting to be a Sebi official and offering suchinvestment advice or seeking such information, individuals may not entertain such callsand deny him / her such access and verify the details of such purported official from Sebiwebsite," the regulator said.Insurance regulator IRDA recently came across various instances of certain insuranceagents making calls to the investors in the name of regulatory officials and asking them toswitch their insurance polices for new ones, thus seeking to earn huge commissions.In a recent public notice, banking regulator RBI also said that it has come across instancesof emails being sent in its name to the people, offering them a new online securityprotection to reduce fraud and theft in banking systems.The RBI said it has neither developed any such software nor it sends any such mails askingonline banking customers to update their account details to secure their bank accounts.The central bank has asked the people receiving such phishing mails not to open anyattachments, as it might result in identity theft and pose threats to their bank accounts.Source:http://www.business-standard.com/india/news/sebi-warns-against-fraud-regulatory-calls-to-investors/202299/on Banking Ombudsman Scheme to be reviewed, updated and revised : RBI January 11, 2013Banking Ombudsman Scheme may be widenedThe Reserve Bank of India ( RBI) has constituted an internal working group to review,update and revise the Banking Ombudsman Scheme, which was last reviewedcomprehensively in 2006. While the scheme in its current form covers all aspects ofbanking, from the point-of-view of customer service, there are some areas, which expertshope would be addressed as part of the review.In 2011-12, the Banking Ombudsman Scheme was able to dispose off 94 per cent of the77,507 complaints it received. This has been the disposal rate for three years in a row, RBIsaid in its annual report on the Banking Ombudsman Scheme, 2011-12. Most complaintswere related to the failure to meet commitments, or not observing banking code or fairpractices code (25 per cent), followed by credit / debit card (21 per cent) and depositaccounts (12 per cent) issues.RBIs review of the scheme would look at the nature of complaints received and see if anyof these need to be reduced or enhanced. For instance, the impending review might seekto introduce a time frame for the scheme to resolve complaints. At present, if a customer 179 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013has a complaint, he files it with the bank. If the bank does not resolve it in 30 days, thenthe complaint would go to the Ombudsman, who might take another 30-40 days, as itcould ask the bank and / or the customer for clarifications. There are cases when it hastaken two to three months for a complaint to be resolved, says V N Kulkarni, former bankofficial and debt counsellor with Bank of Indias Abhay Credit Counselling Centre. "If thereis no response from the bank, the Ombudsman should take ex parte decision. Sincerepresentations have been made to the RBI, it is possible that this might be addressed inthe revised scheme," he says.Another likely revision, which has also been proposed by the Damodaran Committee oncustomer service, is to ask banks to strengthen their internal Ombudsman schemes sothat the RBIs Banking Ombudsman can function as the Appellate Authority, says anofficial of the Indian Banks Association. Currently, the Deputy Governor of RBI is theAppellate Authority.In the recent past, the role of the scheme has been widened to include internet banking,ATM operations and other electronic services. It is being considered if there is a need toinclude complaints regarding harassment or rude behaviour by counter staff at bankbranches in the ambit of the Ombudsman scheme. Similarly, increasing the geographiccoverage of the scheme from the current 17 offices is also being considered, says a seniorbanking official.In cases where monetary compensation is claimed by customers, the amount prescribed isthe actual loss plus some nominal amount. But, in cases where the customer claimscompensation for, say, mental harassment, it is being considered how much monetarycompensation the Ombdusman can prescribe, the official adds.Customers who are not satisfied with their banks service can approach the BankingOmbudsman with their grievances. While, until now, the scope was restricted to productsand services, going ahead it might be possible to pull up bank staff for poor conduct.While this may seem intangible, it would make bank staff more receptive to customersrequirements.Similarly, if it is possible to resolve a complaint without approaching the Ombudsman, thebank should do it proactively and not wait for customers to lodge a complaint. Hence, atime frame would also help customers.Source: http://www.business-standard.com/india/news/banking-ombudsman-scheme-may-be-widened/498461/ Irda board approves the new product guidelines January 11, 2013New norms will expedite nod for insurance productsNew traditional product guidelines, which are expected in the next few days, will makethe process of product approvals quicker.According to J Hari Narayan, chairman of the Insurance Regulatory and DevelopmentAuthority ( Irda), approvals would now become faster, since the product structures wouldbe clearly defined by the new regulations.The Irda board has approved the product guidelines and these are expected to bepublished in the gazette within a week. The guidelines have proposed changes in the 180 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013product structure, including the surrender charges and commission rates, in order tomake traditional products more transparent."On an average, we have been approving 20 products a month. Post the issuance of theguidelines, we are hoping it would lead to quicker approvals for traditional products," saidthe Irda chief.He added this would be due to the fact that the products would be clearer in theirfeatures. Usually, product approvals may take time due to ongoing discussions betweenthe insurance company and the regulator over clarity in a particular product.Narayan explained that this was seen in the unit-linked insurance ( Ulip) products afterthe new guidelines were issued. After the September 2010 norms were announced forUlips, insurers could clearly understand what could be a product feature and what couldnot be. Hence, approvals came in at a much quicker pace for these Ulip products. "Wehope there will be a similar case with traditional products, too, post new norms comeout," he said.Further, the Irda chief said not all products would have to be re-filed. If there were onlyone or two changes in the product feature, he said that a company could do it on theirown. "A company can make those changes and issue a certificate saying those changeshave been made, as per the new norms. They need not get any approvals from us forselling these products."The guidelines for traditional products of life insurers will have a deadline of April 1 for re-filing group products and July 1 for re-filing other traditional products.The most recent draft on traditional product norms says policy holders will get back asmuch as 50 per cent of their premiums if a policy is active for three years, meaning thepolicy has a minimum guaranteed surrender value (GSV) of 50 per cent.Minimum GSV is a sum of guaranteed surrender value and the surrender value of the anysubsisting bonus already attached to the policy.Source:http://www.business-standard.com/india/news/new-norms-will-expedite-nod-for-insurance-products/498481/ Irda releases exposure draft on Standardization in Health Insurance January 12, 2013Irda prescribes standardised practices in health coverIn order to make health insurance more customer-friendly, the Insurance Regulatory andDevelopment Authority (Irda) released an exposure draft on standardisation in healthinsurance. It attempts to bring uniformity in health coverage practices, including theexclusion of disease conditions and charges across the policies."In order to address the expectation of public more effectively, the authority intends tostandardise / streamline important aspects triggering health insurance complaints," theregulator said on the initiatives proposed in the exposure draft.A standard nomenclature for critical illnesses has been proposed for both hospitals andinsurers to follow, so that customers do not face any difficulty while taking a policy.Cancer, coma, first heart attack, kidney failure and organ transplant are some of thediseases mentioned in critical illness category. The regulator has allowed certain 181 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013exclusions of disease conditions and procedures in 11 critical illnesses including skincancer and HIV induced diseases. Customer also face problems while hospitalisation, sincethey are not aware of the expenses excluded in such indemnity policies. To curb thisanomaly, Irda has proposed that a standard list of exclusions in such hospitalisationindemnity including areas like baby food, internet charges, diaper charges.The regulator, however, has allowed the companies to include the excluded items ofpayment based on product design or as part of hospital expenses. While defining hospitalthe regulator mandated that a facility should have at least 10 inpatient beds in townshaving population less than 1 million and 15 inpatient beds in towns and cities havingpopulation above 1 million to treat the patients under health coverage.The exposure draft called for standardising billing formats and enabling mapping ofhospital information systems to specific data requirements of the Insurance companiesfor faster claim processing and enhanced analysis of data. This is based on therecommendations of the committee constituted by FICCI with purpose of looking atstandardizing the billing procedures in various hospitals to avoid any ambiguity betweenthe health insurance stakeholders.The committee had representatives from all stakeholders including insurers, third partyadministrators (TPAs), providers and consultancy companies and was headed by S. L.Mohan, Secretary General, General Insurance Council. The committee has suggested thatthe bill is expected to be in two formats, one would be the summary bill and the detailedbreakup of the bills.It suggested that the summary bill the provider has to mention the service tax number incase they charge service tax to the insurance company / TPA among others. Further, itsuggested that in detailed breakup of bills, the date on which the service is rendered is tobe mentioned in the bill. Some providers have outsourced the pharmacy to externalvendors. For implementation, the committee has suggested that a central body formaintenance, dissemination and addition of billing codes should be formed.In terms of TPAs, Irda has proposed that the TPA shall only process the claim to facilitatethe insurer to take decision on claim settlement or claims rejection, as applicable. "Onlythe insurer shall have the right to settle or repudiate a claim," said Irda in the draft. It hascalled for TPAs to process all the claims applications to the extent possible within 2working days after receipt of the complete set of claim documents.The regulator will make these initiatives mandatory across the industry after receivingsuggestions and comments from the stakeholders, who have been given 10 days torespond on the exposure draft.Insurance player said that this would lead to a better user experience for customers."Customers have been wary of the multiple charges and opaque policies issued in healthinsurance. These guidelines, once passed, would ensure that the policies are transparentfor end-users," said the health insurance head of a non-life insurer.Source:http://www.business-standard.com/india/news/irda-prescribes-standardised-practices-in-health-cover/202458/on 182 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Sebi eyes 24/7 monitoring through IMSS January 14, 2013Sebi to strengthen surveillance systemWith an aim to deploy latest technology and know-how to tackle ever-changing nature ofthreats to investor interest, Sebi is looking to overhaul its market surveillance and networkmonitoring systems.In this regard, the capital markets regulator Sebi (Securities and Exchange Board of India)has begun a process to rope an IT service provider for monitoring of its IMSS (IntegratedMarket Surveillance System) network through a Network Monitoring Centre that wouldoperate on a 24/7 basis.The IT service provider would be contracted by Sebi for a period of three years, which canbe later extended for six years, a senior official said.Sebi undertakes its market surveillance functions through IMSS, which went live in 2007and collects data for suspicious market activities through multiple sources, including itsnetwork systems at stock exchanges and depositories.The IT service provider would need to monitor this network on a daily basis and would berequired to have a highly competent Security Monitoring Operations Centre, which wouldoperate on a 24/7 basis.This Security Monitoring Operations Centre would be used for remote monitoring ofsecurity and surveillance infrastructure of IMSS, provide periodic security status reports toSebi and real-time status reports through an online facility, and propose changes in lightof latest security best practices and latest security threats.Sebi would consider only those companies for the job that have been in the business for atleast ten years, have had a minimum networth of Rs 100 crore in last three years and aworkforce of 25,000 personnel or more.The service provider would need to deploy its qualified resident engineers at Sebis IMSSdata centres, as also for managing various other network systems.The move is aimed at helping Sebi in its efforts towards a stronger continuous monitoringof manipulation attempts in the stock market and analysis of daily transaction data.The IMSS system has also proved very useful in situations of high volatility, and the timeswhen the attention is mostly focussed on major market-moving developments.The market manipulators tend to be more active in these situations, thinking that theoversight machinery would be mostly focussed on monitoring issues like risk-management systems and proper settlement of payment obligations.However, the IMSS keeps working on an auto-pilot like basis and an upgraded systemwould further help in the surveillance activities of the regulator.The system collects transaction and master data from stock exchanges and depositorieson a daily basis to generate alerts for predefined market manipulation scenarios.It also provides data analysis and benchmarking tools, which are used in various policydecisions of the Sebi.Source : http://www.business-standard.com/india/news/sebi-to-strengthen-surveillance-system/202530/on 183 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Comments on final norms for new banking licenses submitted to RBI : FinMin January 15, 2013New banking licences : Finance Ministry raises hope about final guidelinesThe finance ministry has sent its comments to the Reserve Bank of India on the proposednorms for the issue of licences to new private sector banks, raising hopes that the centralbank may come up with the final guidelines soon.The ministry has proposed that the RBI should clearly define promoter, besidessuggesting an appropriate banking structure in the country with a few national andinternational level banks at the top, an official familiar with the matter told ET. Theministry has also suggested that the RBI drop the condition that restricts promoters withexposure to stockbroking and real estate from seeking bank licences, added the official,who did not wish to be named.The RBI had sought the ministrys comments late last month, after Parliament passed theBanking Laws (Amendment) Bill 2011, empowering the central bank to regulate banks.The bill gives RBI powers to supersede bank boards and allow it to inspect the books ofassociates of banking companies to ensure bank funds are not misused. In the 2010-11budget, the then finance minister Pranab Mukherjee had said that the government wouldissue new licences. But the RBI, which issued the draft guidelines in August 2011,maintained that it would not issue the final guidelines until it was adequatelyempowered to regulate banks.As per the original norms, promoter should be defined as per the definition of the Sebi,but the government wants the RBI to provide an exact definition instead of referring tosome other legislation. Similarly, it wants promoter group to be defined clearly to pointto entities where promoters have substantial control or ownership.The ministry has proposed that a licence may be given to a non-operative financialholding company (NOFHC) and not to a nonoperative holding company as proposed bythe RBI to clearly indicate that only financial sector holding companies will be able to get alicence. The ministry has also said that RBI should remove the condition that NOFHCshould not set up any new financial entity at least three years from the date ofcommencement of business, terming it too restrictive. "The view is that there may berelated banking activities which may be required to support the core banking business. So,the RBI has been asked to remove any such restrictions," the official said.The ministry has also requested the RBI to come up with a clarification on the guidelineswhich prohibit any bank from acquiring more than 5% shareholding in another bank."The government wants that this should not be a hindrance to mergers, especially forpublic sector banks, in the long run," the official said. The government has suggested thatsuch acquisition should be allowed after the RBIs permission as provided under therecently amended legislation.The ministry has also suggested that the RBI drop the condition that groups having morethan 10% of income or assets or both from real estate or stockbroking in any of theprevious three years should not be eligible for licences. The government has argued thatthere is no need to expressly impose curbs on businesses of promoter groups since thereis already a ban proposed on new banks taking exposure to promoters, entities belonging 184 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013to the promoter group and those associated with promoter group, and the condition ofarms-length dealing with such entities.Source:http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/new-banking-licences-finance-ministry-raises-hope-about-final-guidelines/articleshow/18027307.cms Implementation of GAAR postponed to 01-04-2016 January 15, 2013Tax-avoidance rules delayed by 2 yearsIn a move that is likely to soothe the nerves of anxious investors, the government onMonday deferred by two years the controversial General Anti Avoidance Rules (GAAR) thatseeks to empower taxmen to clamp down on deals and income suspected to have beenstructured only to avoid paying taxes."Having considered all the circumstances and relevant factors, the government hasdecided that provisions of Chapter 10A of the Income Tax Act (that deals with GAAR) willcome into force from April 1, 2016 instead of April 1, 2014," finance minister PChidambaram told reporters.The GAAR provisions, put forward in the budget for 2012-13, triggered howls of protestfrom global and domestic business leaders as it can potentially affect almost anybody andeverybody.For instance, many companies, experts had said, would have been forced to restructuresalaries of employees if taxmen concluded that these were structured only to avoid taxes.There was also a lurking fear among foreign institutional investors that they would haveto pay to capital gains tax on investments in Indian markets.Expectedly, the stock markets the cheered the move. The benchmark BSE Sensex jumped243 points to close at two-year high of 19,906.41, a rise of 1.23%.The 50-share NSE index Nifty shot up 72.75 points, or 1.22%, to 6,024.05.Chidambaram said the decision to postpone GAARs implementation was based on therecommendations of the Parthasarathi Shome Committee, which was set up in July toframe a roadmap on the tax avoidance proposals.Chidambaram said the anti-avoidance rules would not apply to foreign funds that werenot taking tax benefits from Indias various tax treaties with other nations.The rules would also not apply to non-resident Indians running foreign funds.According to the proposed rules, investments made before August 30, 2010, would notattract tax provisions under the rules. "The modifications that we have done are fair, non-discriminatory, just and strike a balance between the interest of revenue and interest ofinvestors... so, all apprehensions should now be set aside," the minister said, adding thatonly those arrangements, made for the purpose of tax avoidance, will be brought underGAAR.Source: http://www.hindustantimes.com/business-news/WorldEconomy/Tax-avoidance-rules-delayed-by-2-years/Article1-989421.aspx 185 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Swap Facility for Expansion of Export Credit in Foreign Currency January 15, 2013RBI introduces $-Re swapTo enhance flow of credit to the export sector, the Reserve Bank of India ( RBI) hasintroduced a dollar-rupee swap facility to support incremental pre-shipment export creditin foreign currency (PCFC) by banks, it said on Monday.Banks will have the option to access rupee refinance to the extent of the swap with RBIunder a special export credit refinance facility, said the release.The facility will be available to banks from January 21 till June 28, 2013, for a fixed tenorof three or six months. "During any particular month, the maximum amount of US dollarsthat banks would be eligible to avail of from RBI through swaps would be equal to theincremental PCFC disbursed with reference to a base date (November 30, 2012), subject toa limit," RBI said. The limits would be communicated to eligible individual banksseparately. The limits would be reviewed periodically, based on actual utilisation andother relevant factors. The overall cap for the banking system works out to $6.5 billion,said RBI."Under the swap arrangement, a bank can buy US dollars up to its eligible swap limit fromRBI and simultaneously sell the same amount of dollars forward as per the term of theswap, at the prevailing market rates for swaps of similar tenor," said RBI. At the end of theswap term, the bank will exchange with RBI, the dollars against the rupees, the releaseadded.The facility will be operationalised by RBIs financial markets department here.Depending on the market conditions, the central bank would decide the number of banksthat can avail of the facility, the maximum amount of swap that RBI would undertakewith banks and the maximum quantum each bank can do on a particular day.Source : http://www.business-standard.com/india/news/rbi-introducesre-swap/498865/ Banking facilities in small towns soon January 17, 2013Provide banking facilities in each town : RBI guv SubbaraoRBI Governor D. Subbarao on Wednesday asked banks to meet the target of providingbanking facilities to small towns soon."It is unfortunate that 90 per cent towns of the country did not have banking facilities.The target of RBI is to ensure that every family have a bank account," Subbarao said whileaddressing a programme here.He said that there are six lakh towns in the country, of them one lakh are in Uttar Pradesh."I urge all the banks to soon fulfil target of providing banking facilities in these towns," headded.Accepting that inflation had increased in past few years, the RBI governor said thatthough they had somewhat succeeded in containing it in past two years, it is still there."It is our priority to check price-rise and will remain so", he said. 186 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013On inflow of fake Indian currency notes in the market, Subbarao said that some criminaland anti-social elements were involved in it (circulations of fake notes) and RBI was doingwhatever is possible to check its inflow.Source:http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/provide-banking-facilities-in-each-town-rbi-guv-subbarao/articleshow/18047416.cmsBudget might include the constitutional amendments on GST : FM January 17, 2013Budget will outline amendments to Constitution on GST : FMFinance Minister P. Chidambaram said he would outline amendments to the Constitutionon the Goods and Services Tax (GST) in his Budget speech if there is consensus amongstates on the issue.At his pre-Budget consultations with Finance Ministers of states, he is understood to havesaid that it was time to wrap up loose ends on GST.Sources said Chidambaram told them that he was ready to include the outlines of theamendment in his Budget speech if there is consensus among states. Budget 2013-14 willbe presented on February 28.The Constitution (Amendment) Bill, 2011 has been introduced in Parliament and iscurrently under examination by the Standing Committee on Finance.On the issue of states demand of more compensation for reduction in the Central SalesTax (CST), states were told that the Centre was open to the idea, but all would depend onthe fiscal situation, sources said.The two committees - one on the CST compensation issue and the other on the design ofthe GST - will submit reports to the Centre on January 31.Chidambaram also reiterated that the Centre was committed to stick to the fiscalroadmap and intends to restrict the fiscal deficit to 3 per cent of GDP by 2016-17.He also asked states to give speedy clearance to projects falling in their jurisdictions tospeed up investments.After the meeting, Bihar Finance Minister and Chairman of Empowered Committee ofState Finance Ministers Sushil Kumar Modi said all the states demanded compensationfor reduction in the CST to two per cent from the earlier four per cent."All states raised their own issues, but there were certain issues which were raised by allof them," he said.Among other common issues, Modi said states demanded implementation ofrecommendations of B K Chaturvedi committee on central sponsored schemes.States want that their contribution in central schemes should not be more than 15 percent and also reduction in the total number of such programmesSource:http://www.business-standard.com/india/news/budget-will-outline-amendments-to-constitutiongst-fm/202943/on 187 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 Capital adequacy norms should be relaxed : FinMin to Rbi January 17, 2013FinMin requests RBI for relaxing capital adequacy normsThe Finance Ministry has requested the Reserve Bank to relax capital adequacy norms forbanks in line with the recommendations made earlier this month by the Basel Committeeon Banking Supervision."RBI is fully seized of the matter and we have also requested it to look into the issue. Weare in conversation with them," said an official source.RBI deferred the implementation of Basel III, the global capital norms for banks, by threemonths to April 1.The deadline for the full implementation of the stiff liquidity norms or Liquidity CoverageRatio (LCR) for banks, which were to kick in from 2015, has been extended till 2019.Earlier this month, oversight panel Group of Governors and Heads of Supervision (GHOS),which includes representation from India, of the Basel Committee on Banking Supervisiondecided to ease the LCR regulations.The Committee, a grouping of top regulators and central bankers, had mooted the stiffliquidity requirements for banks to ring fence as well as prevent financial disruptions.A major component of the Basel III banking norms, LCR aims to ensure that a bank has anadequate stock of unencumbered high quality liquid assets to meet liquidity needs for amonths stress scenario.The LCR would be introduced as planned on January 1, 2015, but the minimumrequirement would be 60%. The same would be increased by 10 percentage points in thesubsequent years to reach 100 per cent on January 1, 2019.According to GHOS, this graduated approach is designed to ensure that the LCR can beintroduced without disruption to the orderly strengthening of banking systems or theongoing financing of economic activity.Among others, the panel has approved amendments to LCR rules, including revisions tothe definition of high quality liquid assets and net cash outflows.Source:http://www.business-standard.com/india/news/finmin-requests-rbi-for-relaxing-capital-adequacy-norms/202937/on No registration fee for registrations of new distributors : Amfi January 17, 2013Amfi waives fees for new distributor registrationsIn a move aimed at attracting more distributors to sell mutual fund products, theAssociation of Mutual Funds in India ( Amfi) has waived fees to those who register to beone till June 30.Come February 1, individuals who want to register with Amfi to be an MF distributorwould not have to pay Rs.3,000 as fees. Amfi hopes it will be able to add around 100,000distributors in the sector, taking it to 150,000 from the current 50,000 active ones."The objective is to create a larger number of feet-on-street to distribute MF products," 188says H N Sinor, chief executive officer (CEO) at Amfi. There will be no registration fees for Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013new distributors in the categories of individuals (including senior citizens) and new cadresof distributors.A person who had attained the age of 50 as on May 31, 2010, or has at least 10 years ofexperience in the securities market or in distribution of MF products will qualify as asenior citizen, in line with the Securities and Exchange Board of India (Sebi) criteria."The registration fee of Rs.3,000 was a deterrent for distributors, since their earnings arenot very significant. Waiving of this fee will have a lot of genuine distributors interestedagain," says Rajiv Bajaj, vice-chairman and managing director, Bajaj Capital.Many distributors had stopped selling MF products since August 2009 after Sebi bannedentry load, an initial fee that funds charged investors to pay distributors. Stringent rules inthe registration process also resulted in distributors selling other products with higherfees, such as company deposits and insurance.However, Amfi has said the new distributors should have passed the examination of theNational Institute of Securities Markets. It has also decided to include agents engaged indistribution of other financial products such as insurance, public provident fund or fixeddeposits, among others, with at least five years of experience under the special cadre ofdistributors.According to Waqar Naqvi, CEO at Taurus MF, the earnings of distributors after the entryload ban had gone down. "This is a good move, which will attract distributors towardsselling MFs," he said.MF sector officials said distributor apathy and unfavourable market conditions hadcontributed to the lack of growth in the past couple of years. Indian households have one"If the sector gets more people on the ground, it will help us reach out to retail customers.We are a nascent industry and we need a better distributor network. I hope this move willhelp increase the base (of investors)," said Sundeep Sikka, CEO of Reliance MF.While Amfi tries to rope in more distributors, executives say mis-selling needs to bechecked. Jimmy Patel, CEO of Quantum MF, says, "This move will certainly help create anew cadre of distributors but this should not act as a licence for them to mis-sell.Appropriate training is essential to ensure they play an appropriate advisory role, since thenew cadre would leverage their existing personal relationships with households, whichwould be helpful to increase MF penetration."Agreeing, Bajaj said Amfi has to ensure quality filtration and only genuine and long-termoriented distributors take the Amfi registration number code during the free drive.Source:http://www.business-standard.com/india/news/amfi-waives-fees-for-new-distributor-registrations/499026/ Govt. to consider proposal for setting up holding company for PSU banks January 17, 2013Cabinet to propose setup of holding co for PSU banksThe government is likely to consider within a few weeks a proposal for setting up aholding company for public sector banks to enable them to raise capital from the marketinstead of seeking funds from the exchequer. 189 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013"We are moving to Cabinet for setting up a holding company for the public sector banks,"said an official source.It will take 2-3 weeks. There will be one holding company for all public sector banks,sources said. They said the Law Ministrys opinion has been sought for making legislativechanges as various acts will have to be synchronised and amendments will be required inthe Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980.Besides, State Bank of India Act 1955 and SBI Subsidiaries Act 1959 will have to besynchronised with the holding company structure."Law Ministry has to vet the proposal first. Then it will go to cabinet." the source said.As per the structure proposed, 99% of government holding in the bank will be shifted tothe Holding Company and the government will retain 1% with itself so that it remains astate-owned bank, sources said.The company can be managed by 3-4 part-time officials, they added.The Budget 2012-13 had proposed the setting up of a financial holding company thatwould help raise resources to meet capital needs of state-owned banks.Source:http://www.business-standard.com/india/news/cabinet-to-propose-setupholding-co-for-psu-banks/202915/on CCEA authorises NIF to buy public cos shares January 18, 2013Investment fund gets nod to buy public cos sharesThe Cabinet Committee of Economic Affairs (CCEA) on Thursday authorised the NationalInvestment Fund (NIF) to buy shares of public sector enterprises, including banks andinsurance companies. The move will enable the government to utilise the disinvestmentproceeds for recapitalisation of banks and public sector insurance companies.The CCEA, headed by Prime Minister Manmohan Singh, also imposed 2.5 per cent importduty on crude edible oil to protect domestic farmers. However, duties on refined cookingoil remain unchanged at 7.5 per cent. At present, crude edible oil attracts no import duty.It has also lifted the freeze in tariff value of edible oils, for the first time in more than sixyears, and aligned them with international prices. "An alignment of notified tariff valueswith international prices will have a positive impact on the duty collected from import ofedible oils and will provide an even-field to the domestic refining industry, whileenhancing the import duty will be negligible at less than Rs 1 per kg," the government saidin a statement released after the Cabinet meeting.India imports more than half of its total domestic requirement of cooking oil, estimated tobe around 12 million tonnes.The government said with effect from FY14, the disinvestment proceeds will be creditedto the public account under the head NIF, and they would remain there until withdrawnor invested for the approved purposes.According to the official statement, the fund will be used to subscribe to shares issued bythe Central Public Sector Enterprise ( CPSEs), including public sector banks and publicsector insurance companies, on rights basis so as to ensure the overall governmentholding does not fall below 51 per cent. 190 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Besides, the fund will be used for preferential allotment of shares of CPSE to promoters sothat government holding does not go below 51 per cent, in all cases where CPSE is goingto raise fresh equity to meet its capital expenditure programme.The funds managers presently managing the NIF will stand discharged of theirresponsibility from the date the funds and the interest income are transferred to the fund.NIF, set up in 2005, is being managed by three fund managers - UTI Asset ManagementCompany, SBI Funds Management Company and LIC Mutual Fund Asset ManagementCompany.As much as 75 per cent of the income from NIF is used to finance selected social sectorschemes, while the rest is utilised to meet the capital investment requirements ofprofitable and revivable central PSU.However, in 2009, the government had decided to put a moratorium on puttingdisinvestment money in NIF. Since then, all the proceeds have been used for funding sixsocial sector schemes.The government also gave its nod to the proposal of the Department of Commerce,allowing export of processed and value-added agricultural products, even in the event ofban on export of basic farm produce.The CCEA also approved the recommendations of the inter-ministerial task force headedby Planning Commission member B K Chaturvedi on budgetary ceilings for annuitycommitments under public private partnership (PPP) projects across sectors. This wouldensure that future budgetary options are not restricted due to annuity payments for PPPprojects, the government said."The guidelines would be communicated to ministries for adoption within two weeks.These guidelines will streamline the process of structuring and sanction of projects underannuity mode of PPP," it said.Apart from this, the CCEA also approved the extension of the Jawaharlal Nehru NationalUrban Renewal Mission (JNNURM) to sanction new projects and capacity buildingactivities till March 2014.The proposal would enable provisioning of creation of urban infrastructure, particularly insmall and medium towns. These projects would be subsumed in the next phase of theJNNURM for the 12th Plan.Other Decisions NTPC land transfer : The Cabinet on Thursday approved transfer of landfrom state-run NTPCs Badarpur power plant to the Delhi government, a move that wouldhelp in widening a link road on NH-12 and ease traffic congestion in south Delhi. A strip ofland measuring 245.35 square metres would be transferred to the Public WorksDepartment, government of National Capital Territory (NCT) of Delhi, according to anofficial release.DESU package : The Cabinet approved a financial assistance package including loansworth Rs.3,326.39 crore for the Delhi government to clear dues of erstwhile statutorybody Delhi Electric Supply Undertaking (DESU).UP road : A 290-km national highway stretch between Tanda and Banda in Uttar Pradeshis to be widened to two-lane at an estimated cost of Rs.1,119 crore, a official statementsaid after the Cabinet meeting.Source:http://www.business-standard.com/india/news/investment-fund-gets-nod-to-buy-public-cos-shares/499246/ 191 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 CBDT clarifies onsite software development not taxable January 18, 2013Onsite software development eligible for tax sops : CBDTThe Finance Ministry on Thursday clarified software developed at a clients place abroadwould be deemed as export and be eligible for tax benefits. It also said income fromdeputation of manpower for such work would be allowed tax benefits.Earlier, IT companies had received tax notices from the government to pay tax on gainsderived from export of manpower for onsite software development. Many such caseswent into litigation and the companies sought clarification from the government. TheCentral Board of Direct Taxes ( CBDT), after examining a report by the N RangacharyCommittee which was set up to address the issue, said profits arising out of the export ofsuch services are eligible for direct tax benefits under Section 10A, 10AA and 10B of theIncome Tax Act."The clarification will set at rest controversies and disputes arising due to differentinterpretations of the Act being made across the country. However, there must exist adirect and intimate nexus or connection of development of software done abroad witheligible units set up in India and such development of software should be pursuant to acontract between the client and the eligible unit," CBDT Chairperson Poonam KishoreSaxena said at a press conference. Nasscom, the industry body that represents the IT andIT-enabled services industry in India welcomed the clarifications and expressed hope theassessments and past denials would be suitably resolved taking in to cognizance theseclarifications. "While this is a positive step, it is important that the implementation iscarried on efficiently. We urge that benefits denied in the past be reviewed in light of thismove, and there be swift closure of cases for the Industry to benefit from this," it said.Welcoming the decision, V Balakrishnan, director, and Head of BPO, Finacle and Indianbusiness of Infosys said the clarifications issued by CBDT removes one big uncertainty forthe industry and will help it to focus on growth in the challenging environment."We are grateful to the chairman and members of the Rangachary committee forunderstanding and being sympathetic to the industrys view points," added Balakrishnanwho is also a former CFO of Infosys.Infosys is one of the many Indian IT companies that were slapped with tax notices earlierbecause of the anomaly.CBDT also clarified that any research and development activity embedded in Engineeringand Design would also get tax benefits. In case of a slump-sale of a unit, purely becauseof change in ownership, the claim of exemption will not be denied to an otherwise eligibleundertaking and the tax holiday can be availed for the unexpired period at the rates asapplicable for the remaining years.It said though the assesses need not maintain separate books of account for unitsclaiming tax benefits, the assessing officer, if required, might call for details orinformation pertaining to different units to verify the claim and quantum of exemption.Also, tax will not be denied merely due to physical relocation of an eligible SEZ unit fromone SEZ to another. The relocated unit will be eligible to avail of the tax benefit for theunexpired period at the applicable rates.The CBDT said that the setting up of a fresh unit where an eligible unit is already existingwould not make the unit ineligible for tax benefits, as long as the unit is set-up after 192obtaining necessary approvals from the competent authorities, has not been formed by Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013splitting or reconstruction of an existing business and fulfils all other conditionsprescribed in the relevant provisions of law."These clarifications recognise that tax incentives provisions need to be liberally andharmoniously interpretated to further the objective of earning valuable foreign exchangefor the country and will end the ongoing tax controversies plaguing the sector as to whatservices are covered and constitute exports. The clarification that tax holiday should notbe denied merely on the ground of physical relocation of an eligible SEZ unit from one SEZto another, further resonates the CBDT decision to recognise the ground realities andjudicial precendents, the affected units can now can finally enjoy the tax benefits" saidRajiv Chugh, Tax Partner, Ernst & Young.The Rangachary Committee on Taxation of Development Centre and IT Sector was set upin August 2012 and submitted its report in September 2012.Saxena said that the recommendations of the committee in its first report, pertaining toother issues concerning development centres and its subsequent two reports on safeharbour provisions for IT and ITeS sector and safe harbour issues for outbound loans andcorporate guarantee are under examination.Officials said some other recommendations of the committee might need amendments tothe Income Tax Act which will be done through the Budget next month.Source : http://www.business-standard.com/india/news/onsite-software-development-eligible-for-tax-sops-cbdt/499239/ Debt segment on bourses : Sebi January 19, 2013Sebi creates separate debt segment on stock exchangesWith an aim to develop corporate debt market in the country, Sebi decided to create aseparate debt segment on stock exchanges, wherein banks would also be allowed tobecome trading members of the bourses and trade in this market."...this will help in the development of debt market on the Indian stock exchange. This willbring in more volumes and liquidity," Sebi Chairman UK Sinha told reporters here after theboard meeting."I personally feel that its a very positive decision and what RBI has done and we are in Sebitrying to implement. We are implementing what RBI has done," he said.In another decision, Sebi also decided to amend the regulations to enable two-wayfrangibility of Indian Depository Receipts of foreign firms listed in India, pursuant to whichthe investors can benefit from leveraging between the Indian and foreign securities of theconcerned company.Besides, Sebi board also approved various amendments to its regulations governingInfrastructure Debt Funds (IDFs), including allowing the tenure of such funds to beextended by up to two years with the consent of two-third investors.With regard to the new debt segment on stock exchanges, Sebi said it will provide fortrading, reporting, membership, clearing and settlement rules, risk managementframework and other necessary provisions.The move would facilitate Scheduled Commercial Banks to become members ofrecognised bourses for the purpose of undertaking proprietary transactions in the 193corporate bond market. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Besides, in order to enable direct membership of banks and other institutionalparticipants in the debt segment, the regulator has approved some amendments relatedto its rules governing stock-brokers and sub-brokers.The regulator has included debt, derivatives and currency derivatives segment in thedefinition of clearing members, self clearing members and trading members.Sebi has also introduced the definition of "proprietary trading member" to permitinstitutions such as scheduled commercial banks, primary dealers, pension funds,provident funds, insurance companies and mutual funds for trading in the debt segment.Regarding, IDF, Sebi said an IDF scheme would be allowed to invest upto 30 per cent of itsAssets Under Management (AUM) in assets from the current ceiling of 20 per cent.The new investment limit is subject to the condition that the sponsor / associate retainsat least 30 per cent of the assets sold to the IDF till the assets are held in the IDF portfolio.Source:http://economictimes.indiatimes.com/markets/regulation/sebi-creates-separate-debt-segment-on-stock-exchanges/articleshow/18077701.cms Sebi relaxes IDF regulations, margin requirement under offer for sale January 19, 2013Sebi relaxes margin requirement under OFSCapital market regulator Securities and Exchange Board of India (Sebi) made furtherrelaxation to the offer for sale (OFS) route by giving an option to institutional investors tobid without 100 upfront payments.Along with the complete upfront margin, institutions will now be able to place orderswithout upfront margin in line with secondary market practice. However, investors whobid without upfront margins will not be able to allowed to cancel or revise downwardstheir price or quantity. Also, trades for such investors will be settled on a T+2 basis(transaction date plus two days).Meanwhile, institutional investors who will bid with 100 per cent margin amount willhave a T+1 settlement and also can modify or cancel their orders.A lot of market participants, including the government, has requested Sebi to do awaywith the margin requirement due to foreign currency risks and uncertainty of allotment.Sebi also made the bidding process more transparent by directing stock exchanges todisclose indicative price and order book throughout the bidding session. Earlier, theindicative pricing was disclosed less than an hour before the close of trading.The revisions were made to help companies achieve the 25 per cent public shareholdingrequirement.Currently, there are about 125 private companies with promoter holding greater than 75per cent. These companies will have to offload about Rs.23,000 crore worth of paper toattain minimum public holding."The deadline of June 2013 to achieve minimum public shareholding is fast approachingand large number of promoters are expected to offload their shares through OFS route,"said Sebi in a release.Sebi also announced minor tweaks to the takeover code regulations. The regulator said ifthe open offer obligation gets triggered through a combination of modes, the relevant 194 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013date determining the offer price shall be the earliest date on which obligations aretriggered. Sebi also clarified that the date of the board announcement for preferentialallotment will be considered as the relevant date for triggering open offer obligations anddetermination of offer price. Sebi also aligned takeover code regulations with insidertrading regulations with regard to buy or sell of two per cent by persons holding morethan five per cent."The good thing is there were no suggestions from the industry to make substantialchanges to the takeover code. Most of the suggestion were procedural in nature," said UKSinha, chairman, Sebi.Sebi also made relaxations to the Infrastructure Debt Fund (IDF) regulations by wideningthe definition of strategic investors to include systemically important NBFCs and long-term FIIs. Sebi also said permitted IDFs to invest pre-payments in any public financialinstitutions or infrastructure finance companies. Currently, such funds have to kept incash or money market funds. Among other things Sebi also extended the new fund offerperiod for IDFs from 15 days to 45 days and made relaxations in the limits in below-investment grade investments."So far Sebi has received only three applications for IDFs, two of which have beenapproved and one has got an in-principle approval. However, no IDF scheme has beenlaunched so far," Sinha said.To develop the bond market, Sebi said that a separate debt segment will be created onthe stock exchanges similar to derivatives and currency segments.Sebi also allowed two-way fungibility of Indian Depository Receipts (IDRs) and said thatwould soon provide a detailed roadmap for existing and future IDR issuances. Theregulator also tweaked the know your client regulations (KYC) by asking intermediaries tothe original documents of their clients and to submit just the scanned images of the KYCdocuments with proper authentication to the KYC Registration Agency.Source:http://www.business-standard.com/india/news/sebi-relaxes-margin-requirement-under-ofs/203230/on Real estate, broking firms should be allowed to set up banks : FinMin to RBI January 21, 2013FinMin favours real estate, broking firms to set up banksThe Finance Ministry has expressed the view that the Reserve Bank should allow realestate companies and broking firms to set up banks as adequate safeguards will be thereto prevent exposure of promoters to related entities.In its comments to RBI on the giving out new bank licences, the ministry has said thatsuch entities can be allowed, but there should be complete ban on taking exposure in thegroup companies or entities related to promoters, sources said.Even the vendor and large customers of such promoters cant get loan from the new bank,sources said, adding that this move will minimise accumulation of risk.So, the firewall has been proposed to avoid undue influence of bank CEO to lend to thegroup companies, they added. 195 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013As per the RBIs draft norms for licensing of new banks in the private sector released in2011, "entities or groups having significant (10% or more) income or assets or both fromreal estate construction and or broking activities individually or taken together in the lastthree years will not be eligible".Explaining rationale for not permitting such entities, the RBIs draft guidelines said, thereare certain activities, such as real estate and capital market activities, in particular brokingactivities which, apart from being inherently riskier, represent a business model andbusiness culture which are quite misaligned with a banking model.Post-crisis, it said, there are concerted moves even internationally to separate bankingfrom proprietary trading."More importantly, in India, past experience with brokers on the boards of banks has notbeen satisfactory. It will therefore be necessary to ensure that any entity/ groupundertaking such activities on a significant scale is not considered for a bank licence," theguidelines added.The Finance Ministry has also suggested that the Non-Operative Holding Company(NOHC) may be substituted by the Non-Operative Financial Holding Company (NOFHC) tosignify that only financial sector entities are part of the NOFHC.RBI will regulated financial holding company and different entities under the holdingcompany will be regulated as per the business they carry out, sources said.In its recommendations, the ministry has also proposed to lift the ban on setting up ofnew financial services entities under the NOFHC for at least three years from the date ofcommencement.It has also favoured RBIs proposal of opening 25% of branches in unbanked areas of thecountry."The bank shall open at least 25% of its branches in unbanked rural centres (population upto 9,999 as per 2001 census) to avoid over concentration of their branches in metropolitanareas and cities which are already having adequate banking presence," the draftguidelines had said.Source:http://www.business-standard.com/india/news/finmin-favours-real-estate-broking-firms-to-setbanks/203326/on PSUs may not be allowed to issue tax-free bonds in FY14 : FinMin January 21, 2013FinMin unlikely to allow PSUs to issue tax-free bonds in FY14The Finance Ministry may not allow state-owned companies to float tax-free bonds in theforthcoming Budget as they have not been utilising the funds raised through theseinstruments for infrastructure development.Although the primary objective of tax-free bonds is to encourage state-owned companiesto invest in long-term infrastructure projects, they are mostly parking the funds in debtinstruments to earn interest income."Instead of directing the funds raised from tax free bonds towards infrastructuredevelopment, public sector companies issuing these bonds park the money into fixeddeposits and earn interest," a senior Finance Ministry official told PTI. 196 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The existing practice of parking the funds in debt instruments defeats the purpose ofaccording tax benefit to bonds, the official said, adding that the Ministry may not allowPSUs to raise funds from such issuances.The Finance Ministry, sources said, has already raised the issue with the heads of PSUswhich were granted permission to float such instruments.Besides, the Central Board of Direct Taxes (CBDT) too has opposed these bonds as theyresult in revenue loss.The government had in 2012-13 allowed state-owned financial institutions to raise aboutRs.60,000 crore from tax-free bonds, as compared to Rs.30,000 crore in the previous fiscal.This included Rs.10,000 crore for NHAI; Rs.10,000 crore for IRFC; Rs.10,000 crore for IIFCL;Rs.5,000 crore for Hudco; Rs.5,000 crore for National Housing Bank; Rs.5,000 crore forSidbi; Rs.5,000 crore for ports and Rs.10,000 crore for power sector. Sidbis name was laterremoved from the list.Source : http://www.business-standard.com/india/news/finmin-unlikely-to-allow-psus-to-issue-tax-free-bonds-in-fy14/203327/on Sebi notifies Investment Advisers Regulation, 2013 January 22, 2013Sebi asks banks, NBFCs to separate investment advisory servicesMarket regulator Securities and Exchange Board of India (Sebi) said investment adviserswho are banks, non-banking financial companies (NBFCs) and corporates will have tosegregate investment advisory services from other activities.Sebi, which notified Investment Advisers Regulation 2013, has also prescribed a minimumnetworth of Rs.25 lakh for investment advisers that are corporate bodies and Rs.1 lakh forindividuals.Existing investment advisers will have one year to comply with these capital adequacyrequirements. Going ahead any person to be an investment adviser will have to obtain acertificate of registration from Sebi.Sebi, however, has exempted a few individual, including those who give general advice ingood faith, or insurance agents who give investment advice solely on insurance products,pension advisors, advocates, who advice their clients incidental to legal practice, fromregistration.An individual registered as an investment adviser will need to have to need to have aprofessional qualification or post-graduate degree or post graduate diploma in finance,accountancy, business management, commerce, economics, capital market, banking,insurance or actuarial science from a university or an institution recognized by the centralgovernment or any state government or a recognised foreign university or institution orassociation. Or will have to be a graduate in any discipline with an experience of at leastfive years in activities relating to advice in financial products or securities or fund or assetor portfolio management.Sebi has said, "An investment adviser shall act in a fiduciary capacity towards its clientsand shall disclose all conflicts of interests as and when they arise."An investment adviser will also have to maintain an "arms-length relationship betweenits activities as an investment adviser and other activities. All investments on which 197investment advice is provided is appropriate to the risk profile of the client. An investment Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013adviser will also have to maintain records of clients Know Your Client (KYC), risk profilingand risk assessment, suitability assessment of the advice being provided, copies ofagreements with clients and investment advice provided, whether written or oral.Meanwhile, Sebi will have the powers to suo motu or upon receipt of information orcomplaint appoint one or more persons as inspecting authority to undertake inspection ofthe books of accounts, records and documents relating to investment advisers.Source:http://www.business-standard.com/india/news/sebi-asks-banks-nbfcs-to-separate-investment-advisory-services/203512/onFunds used for IPO should be scrutinized by monitoring agency : Sebi January 23, 2013Sebi may mandate scrutiny of small cos IPO fund use through monitoring agencyThe Securities and Exchange Board of India (Sebi) plans to make it mandatory forcompanies with an issue of less than 500 crore to appoint a monitoring agency to keeptrack of the use of funds.The monitoring agency will have to provide up-to-date information of the end use of themoney raised till such time the funds have been fully utilised, two persons familiar withthe matter said.At present, only companies with an issue size above 500 crore have to appoint amonitoring agency, usually a banker to the issue. The thinking at Sebi is to now bringissues of a size smaller than or equal to 500 crore in the monitoring agency fold.The proposal is being examined after Sebi noticed a mis-match between the statedpurpose of the fund-raising programme and its end use. Many companies have used IPOmoney for purposes other than the listed objects of the issue either by obtainingshareholder approval or masking the uses as objects.Moreover, Sebi has observed from past IPOs that the shares inevitably take a beating afterthe IPO, wiping out investor wealth. An internal analysis by Sebi showed that 72 out of117 issues in 2008 and 2011 were trading below the issue price after six months of listing.Of these, the share price of 55 companies had fallen more than 20%."We cannot expect people to invest in the market when they are losing money at a sharprate and well be taking certain significant measures in this behalf very shortly," Sebichairman UK Sinha recently said at an industry event.The monitoring report will have to be prepared by a public financial institution, aninsurance company or by a scheduled commercial bank.A detailed report can also help in spotting financial irregularities, said one of the personsmentioned above."Today, the monitoring of fund utilisation is becoming difficult as companies raise fundsfor multiple non-project corporate purposes such as mergers and acquisitions, generalcorporate purposes and working capital. Earlier, most of the companies tapped the IPOmarket to meet their specific project requirements," said Prithvi Haldea, chairman &managing director of Prime Database. 198 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013In late 2011, Sebi, via an interim order, barred seven companies, including BharatiyaGlobal Infomedia and Tijaria Polypipes, and their promoters from the securities market formisusing IPO money.The promoters of some of these companies diverted part of the proceeds to stock marketoperations, while others siphoned off a chunk of the raised capital on questionable landpurchasesSource:http://economictimes.indiatimes.com/markets/regulation/sebi-may-mandate-scrutiny-of-small-cos-ipo-fund-use-through-monitoring-agency/articleshow/18141784.cms FinMin to approach cabinet for creation of debt management office January 23, 2013Finance Ministry to move cabinet to create debt management officeThe finance ministry will soon move the cabinet for creation of an independent office tomanage its debt and borrowings, although the Reserve Bank of India continues to havereservations on the proposal.The law ministry has communicated its views on the draft legislation seeking to establishthe Debt Management Office, a senior official in the finance ministry told ET."The draft bill has come back from the law ministry," the official said. "We would soontake it to the cabinet."The draft legislation is based on a finance ministry paper on the National TreasuryManagement Agency, in which the Centre would hold 51% equity and states the rest.The DMO is proposed to be set up as an autonomous body under the administrativecontrol of the finance ministry. Representatives of the RBI will be part of its managementcommittee.At present, the RBI manages governments cash and borrowings, and creation of a newentity will take away this role from the central bank.Creation of an independent DMO seeks to remove the conflict of interest inherent in thethree crucial roles that the central bank plays-debt manager, monetary policy managerand banking regulator.The conflict stems from the fact that the RBI as a debt manager would attempt tominimise borrowing costs, but this interferes with its monetary policy manager function.The central bank is required to maintain high interest rates when inflation is above itscomfort level.This would allow the RBI complete independence in conducting the monetary policy evenwhen the government pursues an expansionary fiscal policy.The present arrangement is also seen to be interfering with interest rates in the secondarymarket, thereby coming in the way of development of a vibrant bond market.The central bank manages the governments existing stock of debt and fresh issuancesthrough a separate office.Creation of a DMO was first proposed in the 2007-08 Budget and a middle office wascreated in the finance ministry subsequently. The middle office prepares a medium-term 199 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013debt management strategy, issues periodic calendars for borrowing and manages thegovernments cash requirements.But the 2008 financial crisis put the proposal on the back burner as the government wasreluctant to unsettle an established arrangement. The state governments also expressedreservations over transferring their borrowings management to the proposed DMO andinsisted on the RBI continuing as their debt manager.However, the Justice BN Srikrishna panel, which was set up to look into the financialsector regulation, proposed a separate debt management law in its approach paperreleased in October. This brought the issue back in focus."Debt management requires an integrated picture of all onshore and offshore liabilities ofthe government," the paper said."At present, this information is fragmented across RBI and the ministry of finance.Unifying this information, and the related debt management functions, will yield betterdecisions and thus improve debt management."Source : http://economictimes.indiatimes.com/news/economy/finance/finance-ministry-to-move-cabinet-to-create-debt-management-office/articleshow/18141998.cms Govt. likely to increase the annual agricultural lending target January 23, 2013Govt may hike annual agricultural lending target for BanksThe government may increase the annual target of the banks for lending to theagriculture sector by 22% in the upcoming union budget to 7 lakh crore, in view of therevised classification of priority sector loans issued by the Reserve Bank of India."Banks will be pushed to achieve their direct lending targets and focus on the newimproved Kisan Credit Card scheme," said a finance ministry official, who did not wish tobe named.The banks will be able to meet the new targets easily, the official said, since the revisedclassification includes companies of individual farmers and partnership firms directlyengaged in agriculture and allied activities. By November-end, the banks had extendedabout 5.49 lakh crore to the sector against the target of 5.75 lakh crore for 2012-13. As perthe RBIs norms , banks have to lend 13.5% of their adjusted net bank credit towards directlending to the agriculture sector. The total mandated lending to the sector is 18%,including loans for investment in agriculture and allied activities.A few banks, such as the Central Bank of India (-78.60%), IDBI Bank (-41.71%) and CanaraBank (-3.75%), had registered a decline in direct lending to the sector in the first half of thecurrent fiscal. The government will also push the regional rural banks to open more farmloan accounts and meet the credit needs of farmers, the official said, adding, "The numberof farmer accounts has not been growing as fast as the credit flow. Both commercialbanks and RRBs will need to focus on the same."The banking system covers about 50% farmers in the country.The government will also continue with the interest subvention scheme, which provides3% interest subvention to farmers who repay on time. The subvention is provided onshort-term crop loans, for which the banks charge 7% interest rates. 200 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013"It is an effective mechanism to encourage farmers and will also bring down the bad loansin the sector," the official said. In addition, the farmers who park their produce atwarehouses will also get 3% interest subvention, bringing the real interest rate to 4%.Bankers said the RBIs guidelines would make it possible to meet the revised targets.Source : http://economictimes.indiatimes.com/news/economy/finance/govt-may-hike-annual-agricultural-lending-target-for-banks/articleshow/18142036.cms Banks should offer 30-year fixed rate home loan : RBI panel January 23, 2013Soon, option to pay home loan EMIs for 30 yearsIn a move to protect borrowers from interest rate fluctuations and reduce the burden ofequated monthly instalments (EMIs), a Reserve Bank of India (RBI) committee hassuggested banks offer loan products with a repayment period of 30 years.Such loans, goes the proposal, could have an interest reset provision every seven to 10years but lenders shguidelines on the base rate."The Indian financial system has G-secs (government securities) up to 30 years and 30-year bonds by banks. Banks could, therefore, make efforts to offer longer-tenor fixed rateloans, say up to 30 years, which would help reduce the EMIs of borrowers," says the K Kof introducing more long-term fixed interest rate loan products.The panel feels banks could have the option to fix a reasonable cap and floor (200 or 300basis points) at the time of reset in relation to the interest rate originally charged to theborrower. The suggestion is made to protect both customers and banks from the risksarising out of adverse movements in interest rates.Banks have also been advised to introduce hybrid loan products, having both fixed andfloating interest rate loans with a higher proportion of the former.Fixed rate loan products were popular before 2000 and lost their sheen once interest ratesstarted to fall, which made banks focus on floating rate products. The panel has observedmost home loan products are generally on a 15-25 year maturity and floating in nature.Automobile loansSince bank deposits are mostly below five years, emphasising on longer term fixed rateloan products might create an asset-liability mismatch for banks. So, the panel suggestedbanks should issue more long-term bonds, with a minimum maturity of five years, to theextent of their exposure to the infrastructure sector (minimum residual maturity of fiveyears)."Banks should popularise fixed deposit schemes with tenors above five years, as these areeligible for tax exemption. This would to some extent meet the long-term fundingrequirement of banks," the panel said.Though RBI has banned a pre-payment penalty on floating rate loans, the panel hassuggested banks be allowed to charge one on fixed rate loan products, on only theamount due. This should be reasonable, so that it does not act as a disincentive for fixedrate loan borrowers. 201 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Source : http://www.business-standard.com/india/news/soon-option-to-pay-home-loan-emis-for-30-years/499680/http://timesofindia.indiatimes.com/business/india-business/Banks-should-offer-30-year-fixed-rate-home-loan-RBI-panel/articleshow/18142550.cms Insurance regulator releases framework for monitoring insurance frauds January 23, 2013IRDA comes out with framework for monitoring insurance fraudsIRDA came out with a framework for monitoring frauds in the insurance sector and askedinsuers to carry out due diligence on their staff, including agents.Stating that such fraud reduces consumer and shareholder confidence and can affect thereputation of individual insurers and the insurance sector as a whole, the IRDA askedinsuers to lay down procedures for monitoring and early detection of frauds."Lay down procedures to carry out the due diligence on the personnel (management /staff) / insurance agent / corporate agent / intermediary / TPAs before appointment withthem," the IRDA said in a circular to all insurance companies. The insurers have to submita compliance report with the regulator by June 30, 2013."It is required that insurers understand the nature of fraud and take steps to minimise thevulnerability of their operations to fraud," Insurance Regulatory and DevelopmentAuthority (IRDA) said.It asked insurance companies to ensure that the risk management function is organised insuch a way that the insurer is able to monitor all the risk and take steps to address them.The IRDA classified frauds in the insurance sector under three heads -- claim fraud orpolicyholder fraud, intermediary fraud and internal fraud.It also asked the insurance companies to frame anti-fraud policy and said that thecompanys board would review the policy on an annual basis.Insurer shall inform both potential and existing clients about their anti-fraud policies, theIRDA said, adding that the insurer has highlight the consequences of submitting falsestatement for the benefit of policyholder in the insurance contract.Source : http://www.business-standard.com/india/news/irda-comes-outframework-for-monitoring-insurance-frauds/203650/on Budget 2013-2014 aims at providing Investor-friendly India : FM January 23, 2013FM assures the world an investor-friendly IndiaBurying the ghost of the earlier version of the General Anti-Avoidance Rules (GAAR),Finance Minister P Chidambaram wooed foreign investors to put their money in India,promising a conducive environment, besides a stable tax regime, lower fiscal deficit andhigh economic growth. He sought to allay concerns over the countrys economy, saying itdid not face the risk of a downgrade of sovereign ratings. 202 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013His assertions came a few days after the government modified GAAR and deferred it bytwo years to April 1, 2016."There is universal acknowledgement that we have handled the GAAR situation fairlyeffectively and buried the notion that GAAR would be some kind of a monster," newsagency PTI quoted Chidambaram as saying.Chidambarams efforts to present India as an investor-friendly country has come a littleover a month before the Union Budget and a few days after Moodys Investors Servicereaffirmed a stable outlook on Indias sovereign ratings.Speaking at the Global Investors Meet in Hong Kong, the finance minister indicated beforean audience of about 200 people that tax rates might not be raised and the comingBudget would offer a lot to investors, despite government policy being biased in favour ofthe poor.Chidambaram said fiscal prudence would be a key part of his Budget next month, the lastfull one of the United Progressive Alliance ( UPA) government in its second term.Besides, Chidambaram for the first time gave a clear deadline for the Goods & ServicesTax (GST). The Constitution has yet to be amended to enable the GST rollout but he saidthe government was planning to introduce the GST legislation in the monsoon session ofParliament and get it passed by December. He said all states were on board and a reporton the GST design was expected to be launched this Friday.The minister also said the government was considering raising the ceiling on foreigninvestors investment in government bonds from $10 billion to $15 billion and incorporate bonds from $20 billion to $25 billion. The lock-in period of one year forinfrastructure bonds might also be removed, he indicated. Business Standard could notindependently verify the comments attributed to the finance minister by some investorspresent at the meet.Chidambaram also said the economy could grow by 6.5-7 per cent in 2013-14 and eightper cent the next year. "In the current (financial) year, we will not do better than 5.7 percent," he was quoted as saying by a news agency.For this, Chidambaram urged the Reserve Bank of India ( RBI), a week ahead of the centralbanks monetary review, to strike a balance between the needs of pushing growth andcontrolling inflation.He highlighted infrastructure building as a priority of the government and said theCabinet Committee on Investments, which would hold its first meeting in January, wouldclear all hurdles for large infrastructure projects.The finance minister also tried to give a glimpse of the road map in the medium to longterm for improvement of the Centres finances. In the long term, the government wouldaim at increasing revenues by simplifying tax processes and widening tax base.To rein in its fiscal deficit at 5.3 per cent of the gross domestic product (GDP) this year, thegovernment would primarily curtail expenditure. It aims to bring the fiscal deficit down toto 4.8 per cent next financial year and to three per cent in 2016-17.He admitted the current account deficit, at a record 5.4 per cent of GDP in July-September,was likely to remain high next year, too, but foreign capital flows would be sufficient to fillthe gap.Allaying fears on political logjam on many critical issues, he said most political parties 203 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Source : http://www.business-standard.com/india/news/fm-assuresworld-an-investor-friendly-india/499720/ Aadhaar must for new EPFO accounts January 24, 2013Aadhaar mandatory for new EPFO subscribers from March 1New members joining the EPFOs retirement fund scheme will have to mandatorilyfurnish Aadhaar number as KYC (Know Your Customer) credential for enrolment fromMarch 1, 2013.Employees Provident Fund Organisations (EPFO) existing over 50 million subscriberswould be given time to furnish Aadhar numbers."It has been decided to make Aadhaar numbers mandatory for new members...joining onor after March 1, 2013. However for existing members, the seeding of Aadhaar numberhas to done in a time bound manner," an official order to the field staff said.In case any employees does not have issued the Aadhaar number, the employer can issuean Enrolment Id (EID) as per the guidelines of the body. This EID would be converted intoAadhaar number later on, the order said.The body would also seek the Aadhaar numbers of its pensioners through the banks. EPFOhas decided to use Aadhaar as mandatory KYC credential for to improve its services.The pensioner can submit their Aadhaar number either to their pension paying branch ofthe bank or to the EPFO office.Earlier, EPFO had envisaged to replace its members account number with the Aadhaarnumbers to avoid inconvenience of members as they had to apply for transfer of PFmoney to his new account with the new employer.EPFO is working on to create a central data base where all members would have a uniqueaccount number and would not require to transfer PF accounts to another one onchanging job.Besides, this will help EPFO members, particulary the construction workers, who oftenchange their jobs or contractors.Source:http://economictimes.indiatimes.com/news/economy/finance/aadhaar-mandatory-for-new-epfo-subscribers-from-march-1/articleshow/18154509.cms RBI committee lays down their recommendations for PACS January 25, 2013PACS should be banking correspondents for central co-operative banks : RBIA Reserve Bank of India committee headed by Nabard chairperson, Prakash Bakshi hassaid that primary agricultural credit societies (PACS) should function as businesscorrespondents for central co-operative banks or CCBs rather than as banks.The expert committee on streamlining of Short Term Co-operative Credit Structure(STCCS) has in its recommendation said that as deposits made by members with PACS arenot covered by DICGC, and not being part of the banking system PACS will not be in aposition to issue kisan credit cards (KCC) transactable / working on ATMs and POS devices, 204 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013it would be most appropriate for CCBs to provide these services directly by using PACS astheir business correspondentsThe Committee also noted that almost 40% of the loans provided by PACS and almost halfthe loans provided by CCBs are for non-agricultural purposes, although the share of manyof these PACS and CCBs in agricultural credit was less than 30% in their operational area.The Committee noted with concern that these PACS and CCBs were not performing therole for which they were constituted. The Committee therefore recommends that CCBshould strive to provide at least 70% of their loan portfolio for agriculture.The Committee also recommends that if a CCB or State co-operative consistently underperforms and provides less than 15% share of agricultural credit in the operational area,then that bank should be declared and treated as an urban co-operative bank.Source:http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/pacs-should-be-banking-correspondents-for-central-co-operative-banks-rbi/articleshow/18171997.cms EPFO is likely to roll back the mandate of furnishing Aadhaar number January 28, 2013EPFO may put "in abeyance" decision to make Aadhaar mandatoryIn the face of stiff opposition from trade unions, retirement fund body EPFO may put "inabeyance" its decision to make it mandatory to furnish Aadhaar number for its over 50million subscribers and new members."Amid the pressure from trade unions, the EPFO is likely to put in abeyance its office orderissued to field staff for collecting Aadhaar numbers of existing members and newsubscribers joining the EPF scheme," a source privy to the development said.EPFO has given direction to field staff to mandatorily ask for Aadhaar numbers from newmembers joining the scheme from March 1, 2013 and existing members by June 30.Questioning the decision of the Employees Provident Fund Organisation (EPFO), tradeunion leaders had said that it would be impossible for members to provide Aadhaarnumbers as the scheme was not operational in many parts of the country. Also, it wascumbersome to get the numbers in states where the scheme is operational, unions hadsaid."They should not have taken this decision suo motu. It should have been discussed in theEPFOs apex decision making body, the Central Board of Trustees (CBT)," Bhartiya MajdoorSangh General Secretary Baij Nath Rai had said. He had also said that he would take upthe matter in the CBT meeting scheduled on February 15.Another EPFO trustee and All India Trade Union Congress Secretary D L Sachdev hadoutrightly opposed it saying that EPFO did not need to use Aadhaar number as uniqueaccount number of its members.Earlier, EPFO had envisaged replacing its members account number with Aadhaarnumbers to avoid inconvenience to those who had to apply for transfer of PF money to thenew account with the new employer.It is sadi that this will help EPFO members, particularly construction workers, who oftenchange their jobs or contractors. 205 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Source : http://economictimes.indiatimes.com/news/economy/finance/epfo-may-put-in-abeyance-decision-to-make-aadhaar-mandatory/articleshow/18204695.cms Investment ceiling for insurers should be 5% in group companies : IRDA January 28, 2013IRDA may cap insurers investment in promoter companies to 5%The Insurance Regulatory and Development Authority is considering restrictinginvestments by life and non-life insurance companies in their promoter companies to 5per cent from the current limit of 12.5 per cent.Current investment regulations stipulate that 12.5 per cent of the corpus of unit-linkedinsurance plans can be invested in the insurers promoter company.However, the regulator is of the view that for investment prudence, insurance companiesshould not invest more than 5 per cent in promoter companies.Further, the headroom for investments in the AA rated corporate bonds is proposed to becreated by clubbing the investment limits in government securities along with AAA ratedcorporate bonds. The composite investment limit for AAA rated bonds and governmentsecurities could be set at 75 per cent.For general insurers, the regulator is considering lowering the requirement of 75 per centof investments in AAA rated bonds and government securities to 65 per cent."The differentiation is important, as life and general insurers have different risk profiles.The new norms will help general insurers to invest higher amounts in some higheryielding instruments and help insurance companies improve investment performance,"said a CEO of a general insurance company.After four years, the insurance regulator is planning a comprehensive revamp of itsinvestment regulations for insurers. The regulations will be tabled in the IRDA boardmeeting to be held in February.The total assets under management of life insurance companies and general insurancecompanies were Rs.28-lakh crore and Rs.99,268 crore, respectively, as of March 31, 2012.Source : http://www.thehindubusinessline.com/industry-and-economy/banking/irda-may-cap-insurers-investment-in-promoter-companies-to-5/article4350894.ece RGESS to be launched on February 9, 2013 : FinMin January 28, 2013FM to launch RGESS in Mumbai next monthAiming to attract first-time stock market investors, Finance Minister P Chidambaram willlaunch the much-awaited Rajiv Gandhi Equity Savings Scheme (RGESS) in Mumbai onFebruary 9."He (Chidambaram) is going to Mumbai next month and will formally launch the RajivGandhi Equity Scheme there," sources told PTI.The RGESS, which was announced in the Budget for 2012-13, seeks to provide tax benefits 206to first-time investors in stock markets. Under the scheme, an individual with an income Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013of less than Rs.10 lakh would get tax incentives for investing up to Rs.50,000 in the stockmarket.As per the notification issued by the Securities and Exchange Board of India (Sebi) on theRGESS, there would be a lock-in period of one year on investments made under thescheme.For transactions undertaken by investors through their RGESS designated demat account,depositories would be required to seek necessary transactional details from stockexchanges for enforcing lock-in.The mutual fund houses have already started lining up mutual fund schemes focused onthe RGESS. Two state-owned fund houses SBI and IDBI and one private fund house DSPBlackrock have filed draft offer documents for such schemes with the market regulatorSebi, while others may soon follow suit.The scheme was notified by the Department of Revenue, Finance Ministry on November23 last year.Source : http://www.business-standard.com/india/news/fm-to-launch-rgess-in-mumbai-next-month/204080/on MCX-SX will commence live trading in equities from February 11 January 29, 2013FM to launch equity trading platform on MCX-SX on Feb 9Finance Minister P Chidambaram will inaugurate equity trading platform of MCX-StockExchange ( MCX-SX) on February 9.The exchange would commence live trading in equities from February 11, MCX-SX said ina statement.MCX-SX is providing trading platform for currency derivatives segment at present andwould become a full-fledged stock exchange after the launch of other segments likeequity, equity derivatives, bonds and interest rate derivatives. MCX-SX received last monththe commencement certificate from market regulator Sebi to go live with its tradingoperations as a full-fledged bourse.The commencement certificate is the final go-ahead from the Securities and ExchangeBoard of India (Sebi) for MCX-SX to go live in new product segments such as equity,wholesale debt (bonds) and interest rate derivatives.Sebi Chairman UK Sinha, Department of Economic Affairs Secretary Arvind Mayaramwould also attend the inauguration function, the statement said.MCX-SX would compete with other full-fledged nationwide stock exchanges like BSE andNational Stock Exchange.Commenting on the development, MCX-SX Vice Chairman Jignesh Shah said :"Inauguration of MCX-SX equity segment will be a significant milestone not only for MCX-SX but also for the entire nation. Our exchange adds a new dimension to the exchangeevolution by embedding growth and inclusion that are so critical for a country like India."On the same day, Chidambaram would also launch the much-awaited Rajiv Gandhi EquitySavings Scheme (RGESS), which is aimed at attracting first-time stock market investors. 207 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The RGESS, which was announced in the Budget for 2012-13, seeks to provide tax benefitsto first-time investors in stock markets.Besides, the Finance Minister will also meet heads of top 30 non-bank financial companiesin Mumbai on February 9.Chidambaram is likely to discuss issues related to infrastructure financing, rising non-performing assets along with grant of banking licences to new players by the ReserveBank, sources said.The RBI is likely to issue final guidelines for grant of banking licences to new players by theend of February.A number of large corporate houses, including Anil Ambani-led Reliance Group, financialconglomerates Religare and Shriram groups, engineering-to-technology major L&T groupand Aditya Birla group, are said to be interested in entering the banking businessdepending on the regulatory framework.Source:http://www.business-standard.com/india/news/fm-to-launch-equity-trading-platformmcx-sxfeb-9/204246/on Govt may agree with Shome committee on retro tax January 29, 2013Govt set to accept Shome panel report on retrospective taxationAs in the case of General Anti Avoidance Rules ( GAAR), the government appears set toaccept the recommendations of Parthasarathi Shome panel on application ofretrospective taxation clauses introduced in the Income Tax Act through Finance Act,2012.The issue is significant as Finance minister P Chidambaram would be in London tomorrowin the last leg of his tour to Hong Kong, Singapore, Frankfurt and the capital city of UK toaddress foreign investors concerns.Chidambaram is likely to indicate the governments thinking on retrospective taxation inLondon with British telecom major Vodafone being at the centre of the whole issue. TheShome committee in its draft report had advised the government against implementationof tax rule changes retrospectively and had favoured prospective taxation.It had also suggested that the retrospective taxation should be done in the rarest of rarecases and it should be levied on the entity which had made capital gains. The panel alsosuggested waiver of penalty and interest in such cases.The Shome panel submitted its final report in November which is awaiting financeministrys approval currently.The governments decision on the Shome panel recommendations will have a directimpact on the Vodafone tax case, which is facing over Rs.11,000 crore tax demand onacquisition of Hutchs assets in India.The Income Tax Department had originally raised a demand of Rs.7,900 crore on Vodafoneon its acquisition of Hutchinsons stake in Hutch-Essar through a deal in Cayman Islandsin 2007.Sources in the know of the development said though the Vodafone case was still in theSupreme Court, the government could go ahead and take its call on the retrospective tax 208laws. Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013The governments move on the legal front in the Vodafone case and on the changes in lawpertaining to retrospective taxation could go on simultaneously, said a senior financeministry official.He added that basic principle of retrospective taxation was likely to be framed accordingto the Shome panel recommendations and then government would look at a solution tothe Votafone tax issue, confirming to these norms.Tax experts indicate that with the acceptance of Shome panel recommendations, ratherthan demanding withholding tax from Vodafone, the income tax department would lookat collecting the tax from Hutch which has made capital gains on the deal.A senior income tax department official said that income tax department would be ableto collect taxes on the deal without going out of the bounds of Shome committeerecommendations, if the government decides to do so.Source:http://www.business-standard.com/india/news/govt-set-to-accept-shome-panel-reportretrospective-taxation/204245/onRBI to issue inflation-indexed bonds to wean investors off gold January 30, 2013RBI plans inflation-indexed bonds; may let banks buy back goldIn a bid to wean away people from gold that is increasingly used as a hedge againstinflation, the Reserve Bank today said it is toying with the idea of launching inflation-indexed bonds (IIBs), apart from allowing banks to buy back gold."We introduced that (IIBs) some years ago but that didnt take up due to some designflaws. Since then, we have been trying to redesign it...," RBI Governor D Subbarao said atthe customary post-policy conference."From our side, the attraction of the IIBs is to wean people away from gold.... if you providean asset that gives inflation-indexed return (then they will invest in it)."Certain issues were to be worked out, he said. "There were several questions apart fromthe design of the bond. About which inflation index, do we peg to-- WPI, CPI-- and if wepeg it to CPI, which is above 10 per cent then what interest rate will be offered which willattract retail investors?" he said.Subbarao also spoke about the issues related to timing the launch as the government maywant to do it during falling inflation, while customers would want it during risinginflation.Referring to possibility of disruption of G-Secs market due to launch of IIBs, Subbarao said,"One question which hunts us all the time is whether this will disrupt the G-Sec market."Because it is a wedge between the yield of IIBs and that of the G-Secs. However, if weeducate investors they will see that this is pegged to inflation over a cycle and not to aparticular point of time. Then, people will understand and invest in this".The Governor also said the government and the RBI are working on various proposals toreduce the gold import. "We are shortly going to also consider whether we should allowbanks to buyback gold. There are some regulatory prescription, where it is implied not verydirect, says banks cant buy back gold. That also we are examining." 209 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013Higher gold import has taken a heavy toll on the economy with current account deficittouching 5.4 per cent in the second quarter. Recently, the government increased theimport duty on gold to 6 per cent from 4 per cent to reduce inward shipments.Source:http://economictimes.indiatimes.com/news/economy/finance/rbi-plans-inflation-indexed-bonds-may-let-banks-buy-back-gold/articleshow/18243320.cms Centre refuses the proposal of uniform GST rates January 30, 2013Centre relents, GST not to have a uniform rateThe proposed Goods & Services Tax ( GST) on Tuesday got a fillip, with the Centrerelenting on some key demands of states and paving the way for implementation of theindirect tax reform, albeit in a diluted form. Though no rollout deadline was given, manystate finance ministers said the government at the Centre after the 2014 general electionsshould decide on the issue.A day after clearing Rs.34,000-crore Central Sales Tax compensation to states, the Centreon Tuesday agreed to make changes to the Constitution Amendment Bill for GST.Instead of its earlier proposal of uniform GST rates across the country, the Centre agreedto fix a floor rate of taxation, with a narrow band, besides giving states the flexibility toopt out of the tax system later, if they wanted to.Also, in a deviation from its earlier stand, it agreed on a phased rollout of GST, as in thecase of value-added tax earlier. This means only states that are willing would embraceGST from the beginning. Others could join later."This was a historic meeting, as we moved forward on many issues. There is a consensuson GST design," Sushil Modi, chairman of the empowered committee of state financeministers said at the end of a two-day meet.Some state FMs said every state had its own problems and arriving at a consensus wouldbe difficult. They indicated since general elections were due next year, the Oppositionwould not let the UPA government take credit for introducing the tax reform."The new government should take a call on GST after the 2014 elections. The GST designBJP wants will be friendly to states," said Madhya Pradesh Finance Minister Raghavji.Petroleum products would be part of GST but kept out of the Constitution AmendmentBill, so that the Bill does not have to be changed every time there is a change in theseitems.Sections proposing a dispute settlement authority would be removed from the Bill. TheGST Council would evolve a mechanism for dispute resolution. The quorum for holdingmeetings of the council would be raised to half the members from a third.Source:http://www.business-standard.com/india/news/centre-relents-gst-not-to-haveuniform-rate/500452/ 210 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page
  • Canara Bank Samachar Lehar February 2013 KEY BANKING INDICATORSBANK RATE 8.75% Base Rate of major Banks 9.70-10.50%CRR 4.00% BPLR of major Banks 14.75-18.50%SLR 23% FOREX RESERVES US $ Billion 295.25REPO RATE 7.75% SCB Total Deposits - `. Cr. 64,21,750REVERSE REPO 6.75% SCB Total Credit - `. Cr 49,24,440LIBOR US $ 6 0.4775% CREDIT- DEPOSIT RATIO 76.36%month Compiled by Regional Staff Training College, Gurgaon Sector- 18, Plot no- 80, Near IFFCO Chowk Gurgaon. Email:rstccodel@canarabank.com PH: 0124-2341589 FAX: 2341588 211 Samachar Lehar February 2013 issue- Compiled by RSTC Gurgaon Page