July 20, 2014 Volume 4
FinNiche
FinXpress
FinXpress Volume 4 July 20, 2014
From The Editorial Handing over duties to juniors
CONTENTS
In Focus: What the New Bank of Emerging Economies is All About? Opinion: Towards One Tax India Term of the Week: Bank Rates Market This Week News Fun Corner
Club FinNiche would like to convey its heartily congratulations to all juniors for their enthusiastic participation in clubs and committees activities. Seniors gave a warm welcome to the juniors and passed on the baton to carry on the legacy of their respective club and committee. Club FinNiche is coming up with its Ice Breaking event “Survivor 6.0“ for the First Year students on 3-4 August, 2014. This week we bring to you opinion on “One-tax” India and its impact on economy as a whole .In ‘In-focus’ we bring to you recent developments in BRICS summit 2014. To enhance the financial knowledge, we bring to you ‘central bank rates’ as the term of the week. We hope you would find our articles interesting in this edition of FinXpress. Looking forward to your suggestions for improvements.
Happy Reading!!
Regards Team FinNiche
Disclaimer: FinXpress takes no responsibility for the opinions expressed in the magazine. July 2014
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FinNiche
In-Focus
What the New Bank of Emerging Economies is All About? ------ By Arihant Jain & Shailesh Periwal
On 15th July, 2014, on the very first day of 6th BRICS Summit held in Fortaleza, Brazil, the BRICS nations, Brazil, Russia, India, China, South Africa agreed to set up a $100 billion bank for BRICS members along with a reserve currency pool worth $100 billion. The bank is named New Development Bank (NDB, formerly known as BRICS Development Bank) on the recommendation of Mr. Narendra Modi, Prime Minister of India. The bank will be headquartered in Shanghai, business capital of China and will be headed by an Indian for the first six years, followed by Russia and Brazil. China will get the presidency only after 2 decades. The bank will have a President (an Indian), a Board of Governors Chair (a Russian) and a Board of Directors Chair (a Brazilian). There are few questions that we would want to deliberate on such as what is the purpose of the BRICS Bank? How will it benefit the member nations? And what implications does it have on the global financial landscape? Purpose of NDB New Development Bank, which is also being referred to as “Mini-IMF�, is created with a basic motive to finance infrastructure projects and sustainable developmental projects in the BRICS countries initially but other low and middle income countries will be able to apply for funds at a relatively low rate of interest. They have also created a Contingency Reserve Arrangement (CRA) July 2014
of $100 billion to provide additional liquidity protection in case of balance of payment crisis. The CRA is funded 41% by China, 18% by Brazil, India and Russia, and 5% by South Africa. NDB has the mandate of providing funding for such projects in developing economies and is expected to start lending in 2016. The bank will have an initial capital of $50 billion and all the five nations will have an equal stake in the bank by contributing $10 billion each. So, How Does it Help?
Self Dependent The long standing dissatisfaction with the Bretton-Woods institutions has been a factor towards BRICS nation creating their own alternative financial source. Lack of reforms to become more representative Page 2
FinNiche
In-Focus and reduce the influence of developed economies and bring in reforms conducive to developing nations has resulted in setting up of NDB. Freedom From Restrictions IMF funds often come with several restrictive clauses which are often considered as detrimental for the developing economies in the long term. BRICS nations wants to correct this anomaly by investing in infrastructure projects of member nations at terms which do not hinder their growth in the long
Challenges for BRICS Nations China Dominating the Association Even if all the five member nations of BRICS hailed the formation of NDB, there have been questions whether the other four might simply be paying to move from United States financial hegemony to dominance by China, another economic superpower. These speculations pose a concern for India, as India failed in its bid to host the new bank’s headquarters in New Delhi. Insufficient Funds Even when the NDB’s capital eventually rises to $100 billion, it would not be sufficient to meet the infrastructure needs of the developing economies of the world. The World Bank estimates that South Asia alone requires $2.5 trillion over the next ten years. Implications
term. Increased Bargaining Power Success of NDB and BRICS is expected to provide a much bigger say to the member nations in international negotiations and may lead to the construction of a new economic order. Reduced Impact of International Crisis Asian Economies have, in the recent past, suffered from wide currency fluctuations due to European fiscal policies. The Contingency Reserve Arrangement is created to provide insulation to its members from the impact of international currency crisis.
July 2014
Formation of NDB is going to be an uphill task for them to satisfactorily and efficiently manage its operations. It took the Bretton Woods institutions decades to sort out their differences, even though IMF was headed by like minded liberal democracies. In BRICS , though all members require to develop their infrastructure but lively democracies (India, Brazil and South Africa) go about erecting it differently than the authoritarian regimes (China and Russia) and resolving their difference in principles if going to be a major task. Developing nations hope that NDB will eventually challenge the hegemony of IMF and World Bank over number of issues such as funding for infrastructure projects in developing nations, providing emergency assistance and funding, policy lending and funding to conflict-affected states. NDB setup on the lines of IMF and World Bank will eventually change the face of international development finance.
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OPINION
FinNiche
Towards “one-tax” India….. —— By Yojana Ranasaria
With the Budget rolled out, we are now waiting for another big reform to be implemented this year so that we can realize the dream of uniform tax structure in India. Goods and Services Tax (GST) will replace all existing indirect taxes on both goods and services produced with uniform single tax and simplify India’s confusing tax structure. It was proposed in 2010 with the aim of rationalizing the tax regime and bringing down cost of goods and services. As GST is not a new tax, one need not worry about “yet another tax” been levied. GST is framed as a Value added Tax , initiating from the manufacturer to the wholesaler and then to the retailer, with each one of them just paying tax on the value added at each stage. With the implementation of GST, tax shall be payable at two levels, to the Central government and the State Government.
is also posing a problem in taxation of goods supplied as part of a composite works contract involving a supply of both goods and services, and under leasing contracts, which involve a transfer of the right to use goods without any transfer of their ownership. This problem will be tackled by GST taxation system as it will lead to uniformity in tax payments. At the macro-level it will lead to more tax collection and foster economic growth. It will boost exports as locally manufactured goods will be cheaper in comparison to foreign products and therefore more attractive. Plus administration of tax will also be more organized and coordinated. The GST rates are likely to be around 1620% and alcohol, petroleum, tobacco likely to be out of the purview of GST. Approximately $ 15 billion a year of profits are estimated by the government with the implementation of GST as it is expected to bring about growth in employment, boost in exports and consequently a significant rise in overall economic growth. It is predicted that the GST would contribute about 1.5 % to the Gross Domestic Product of India, and cumulatively, we have already lost one whole years' growth, if we count the delay starting from 2010 alone. Even if we are able to achieve the first step of implementing GST in the next couple of years, it will mean a lot to the industry. GST introduction will support the Government's effort to make India a business-friendly destination, since it affords simplicity, ease of transaction and transparency. What is leading to the delay?
It is imperative to initiate GST as it will firstly lower the tax burden by removing the cascading effect of tax on tax, secondly full set-off of tax on inputs will be available to businesses making it welcome among the business communities and customers( as they will pay less for the goods). Exclusion of services in the current taxation system
JULY 2014
“GST’s opposition is rooted in its very nature of being a uniform tax system, something states resist as it somewhat curtails their control in this regard,” said Anil Sharma, senior research analyst at IHS Automotive. “It is difficult to arrive at a consensus as states governed by other parties often reject the tax split between
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OPINION
FinNiche
Fears of having to be at the Centre’s mercy centre and states, loss of needs, revenues.� and wishes for all fearing their revenue saw the states reluctant towards this welcome reform. Their apprehension is due to the fact that they feel their revenue will be The major according reduced andshortcomings they will loseofit GST to the Centre. to Report Forceuser-based on Implementation The GST ofisTask a end regime, of GST on can beregime summarized as:sourceagainst thethe current which is 1) Not using the correct the accounting based and therefore, worry method of the may result in discrepancies tax concerned states is that they willin lose computation andso compliance revenue; more when they will have 2) Incorrectly claiming on limited ability and GST less credits discretion to A) bank fees unilaterally increase tax rates for meeting B) government charges --such as land tax, their revenue needs. Unfulfilled promises of council rates and water rates. the Central Government on payment of C) the 'total cost' of a business insurance compensation for reducing CST rates have policy. stagnated progress in GST talks with D) wages and superannuation system. states. While the Central Government E) GST-free purchases such as basic food cannot on its own make any announcement items, health services. on theexports GST and introduction, it can take F) car purchases for more than the luxury meaningful measures to overcome the lack car limit. of trust by the states, by addressing the G) compensation assets financed through a commercial GST issue and keeping aside hire purchase.(CHP) adequate funds for the same, in the Budget. H) payments for Yellow Advertising. Recent development of Pages consensus among 3) Not remitting GST on some government States and Centre gives us a hope that GST grants incentives plan willand be rolling at thewhich end ofare this received year. inclusive of GST. 4) GST is not paid on the sale of cars and equipment including the trade of motor vehicles. 5) Claiming a GST credit when the business does not have a valid tax invoice at the time of lodging the Business Accounting Standards.
council rates and water rates. C) the 'total cost' of a business insurance policy. D) wages and superannuation system. E) GST-free purchases such as basic food items, exports and health services. F) car purchases for more than the luxury car limit. G) assets financed through a commercial hire purchase. H) payments for Yellow Pages Advertising. 3) Not remitting GST on some government grants and incentives which are received inclusive of GST. 4) GST is not paid on the sale of cars and equipment including the trade of motor
vehicles.
The major limitations of GST on implementation can be summarized as:
5) Claiming a GST credit when the business does not have a valid tax invoice at the time of lodging the Business Accounting its Standards.
Though this years’ Budget was silent on Not using the correct accounting GST, there is a strong indication that GST method may result in discrepancies in will be chalked out at the end of this year tax computation and compliance by the ruling party. However, it remains to be seen what compromises and changes 2) Incorrectly claiming GST credits on would be made to any GST regime before it A) bank fees is put in place, and what impacts it would B) government charges --such as land tax, have on the economy as a whole. 1)
JULY 2014
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FINANCIAL KNOWLEDGE
FinNiche
Bank Rates Bank Rate is the rate at which RBI lends money to other banks. The bank rate signals the central bank’s long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and vice-versa. Banks make a profit by borrowing at a lower rate and lending the same funds at a higher rate of interest. If the RBI hikes the bank rate the interest that a bank pays for borrowing money (banks borrow money either from each other or from the RBI) increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit. Current bank rate is 9% Call Money is short-term finance which needs to be paid back when demanded, with a maturity period of one day to fifteen days, used for inter-bank transactions. Call money is defined as: “Money loaned by a bank that must be repaid on demand. Unlike a term loan, which has a set maturity period”. Call money is a method by which banks lend to each other to be able to maintain the cash reserve ratio.
decrease the money supply and vice-versa. An increase in reverse repo rate means that commercial banks will get more interest on their money from the RBI, thereby decreasing the supply of money in the market. Current reverse repo rate is 7%. CRR meaning CASH RESERVE RATIO is the minimum percentage of customer deposits that each commercial bank has to hold with the central bank which in our country is the RESERVE BANK OF INDIA (RBI). This amount of money is deposited in the currency chest of RBI. CRR ensures that there is a particular portion of money with RBI risk free and enables RBI to control liquidity in market as well keep inflation in check. RBI increases CRR when there is excess liquidity and reduce CRR to release funds for economic stability and control.
SLR meaning Statutory Liquidity Ratio similar to CRR is the minimum percentage commercial banks have to maintain with the RBI in the form of cash or gold valued not exceeding the current market price or Repo Rate is the rate at which banks in approved securities valued at a price borrow funds from the RBI to meet the gap specified by the RBI in addition to the CRR between the demands they are facing for deposits. The present SLR is at 22.5% money (loans) and how much they have on hand to give. This is used by monetary Marginal Standing Facility is the rate at authorities to control inflation. During high which any commercial bank can borrow Inflation RBI increases the repo rate, due to money from RBI overnight keeping which banks reduce taking loans from RBI, government approved securities. This which ultimately reduces the money supply measure is applicable only when there is in the market and helps in deflation. acute shortage of money with the bank. RBI introduced this policy in the year 2011Current repo rate is 8%. 2012 and the rate is fixed at 100bps above Reverse Repo Rate is the rate at which the the repo rate. RBI has the ability to regulate central bank of a country (RBI in case of short term asset liability mismatches using India) borrows money from commercial MSF. banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country. An increase in the reverse repo rate will
July 2014
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FinNiche
FINANCIAL KNOWLEDGE MARKET THIS WEEK
The market this week had a week start with Sensex at 24,978 as compared to the previous closing of 25,024. The days passed as the focus was more on the BRICS summit in Brazil. The Sensex made a come back to the long holding mark of 25,600-25,700 mark with a 2.19% growth till Friday’s closing bell. The Nifty too performed in a similar way. The growth could have been much better if the mishappening of the Malaysian airliner and the Israel’s ground assault against Gaza would not have taken place. This was clearly interpreted after the fall in the slope of the line graph of the benchmarks through the week. The Russian and Malaysian markets were critically affected by the mishappenings though Dow Jones touched its historical mark of 17,040 in the week. The gold market too weakened as the week tended towards a closure. BSE SENSEX
CNX NIFTY
July 2014
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FINANCIAL KNOWLEDGE
FinNiche
UPCOMING PUBLIC ISSUE-Bhanderi Infracon Limited Security Type
Equity
Issue Period
22 Jul 2014 to 25 Jul 2014
Post Issue Modification
26 Jul 2014
Issue Size (No. of Shares)
540000
Face Value
10.00
Issue Price
120.00
Premium
110.00
Market Lot
1200
Minimum Bid Quantity
1200
Maximum Bid Quantity
512400
Listing @
BSE
Key Policy Rates and Reserve Ratios
Bank Rate
9%
Repo Rate
8%
Reverse Repo Rate
7%
CRR
4%
SLR
22.5%
Exchange Rates INR/1 USD INR/1 EURO
60.33 81.5848
Commodities GOLD(Rs./10 gm)
27997
SILVER(Rs./Kg)
44895
CRUDE(Dollar/Barrel)
July 2014
103
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FinNiche
FINANCIAL KNOWLEDGE
NEWS Indiabulls promoters split empire The three promoters of Indiabulls, the real estate to power group set up 14 years ago, have split. Sameer Gehlaut, chairman of the Rs. 20,600-crore group, will control and manage the group’s flagship companies like Indiabulls Housing Finance, Indiabulls Real Estate, Indiabulls Securities and Indiabulls Wholesale Services. Other promoters, Rajiv Rattan and Saurabh Mittal will control Indiabulls Power Ltd (IPL) and Indiabulls Infrastructure Power Ltd (IIPL) and will not be able to use the Indiabulls brand name after December 31, 2014. EU slaps Rs. 324-cr fine on Lupin for blocking hypertension generic Leading domestic drug makers Lupin, Unichem and Matrix Labs (now part of Mylan) have come under the scanner of the European Commission for curbing entry of the low-cost generic version of cardiovascular medicine Perindopril in the European Union (EU). The anti-trust wing of the Commission has slapped a hefty fine of €427.7 million (around Rs. 3,458.7 crore) on five generic drug manufacturers, besides Servier, a French pharmaceutical company that held patent protection for blockbuster Perindopril.
resolve thousands of transfer pricing disputes and is a key elements of reforms in tax administration regime that Jaitley wants to achieve. The APA scheme, introduced in 2012, provides certainty to taxpayers by specifying in advance the arm’s length price in cross-border transactions between related parties for next five years. The rollback would mean an APA for future transactions may also be applied to international transactions undertaken in the pervious four years in specified circumstances. To align transfer pricing regulations in India with the best available practices, the finance minister has also proposed to introduce the “range concept” to determine arm’s length price. Current rules allow only one year’s data to be used for comparable analysis; the Budget proposed to amend the regulations to allow the use of multiple years. FDI in defence increased to 49%
Of the total fine, Lupin has to pay €40 million (around Rs. 324 crore), while Unichem and matrix have been fined for €13.96 million (around Rs. 113 crore) and €17 million (Rs. 138 crore), respectively.
India’s defence budget went up 12% in 2014-15 over the previous year, to Rs.2,29,000 crore, and further opened the sector to foreign direct investment (FDI), though only to extent of 49% from earlier 26%. The capital budget went up from Rs.89,588 crore in February’s interim allocation to Rs.94,588 crore. The revenue budget remains Rs.1,34,412 crore and Rs.1,000 crore was allocated for the roll-out of the one-rank-one-pension policy announced by the previous government.
FM eases advance pricing regime
RBI pushback on banks’ infra loans
Finance Minister Arun Jaitely in his maide Budget addressed transfer pricing woes of multinational companies by allowing rollback of Advance Pricing Agreements (APAs) to previous years. This will help
The euphoria among banks over the Budget proposal that they don’t have to maintain cash reserve ratio (CRR) and statutory liquidity ratio (SLR) for funds raised to finance infrastructure projects may be
July 2014
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FinNiche
FINANCIAL KNOWLEDGE
NEWS short-lived. That’s because the central bank is preparing to come out with stringent norms n this issue. To start with, the central bank is planning to mandate that such leeway will be given to banks as long as the asset remains healthy. The moment the loan slips to the non-performing category, banks have to set aside funds for CRR and SLR for the entire exposure.
a post-World Cup summit, Russian President Vladimir Putin is rallying them to challenge U.S. and European dominance in international policymaking. “It is time to raise the BRICS’ role to a new level and to make our group an unalienable part of the global order,” Putin said in an interview with the ITAR-TASS news agency, as leaders of Brazil, Russia, India, China, and South Africa met in Brazil.
RBI has voiced its concern over banks lending to infrastructure as it gives rise to an asset-liability mismatch. Leeway on CRR and SLR was a long-standing demand from banks, which the RBI did not agree to till recently. Central bank sources indicated that banks were already over-exposed to infrastructure sector, and opening up the channel could expose them to further credit risk. As a result, proper checks are required to ensure funds are raised for lending to viable projects.
The summit agenda includes the creation of a development bank and a $100 billion currency reserve fund, intended to s serve as counterweights to the World Bank and the International Monetary Fund.
Next Financial Crisis America
Case: Bank
of
The Citigroup mortgage settlement is out of the way, the Justice Department has turned to Bank of America (BAC), the second-largest bank in the United States. It, too, is in trouble over sales of low-quality mortgage bonds leading into the financial crisis. But it would appear that the bank has learned little about negotiating with the U.S. government.
Budget brings tax worries for foreign portfolio investments Portfolio investors based out of the US and other countries with which India does not have favourable tax treaties will have to pay a 15% tax on their derivative transactions, after the Budget decided to classify income from all foreign portfolio investment as capital gains. Three of the top FPI source nations, accounting for Rs.7.8 lakh crore of investments, don’t have favourable treaties on capital gains to exempt them from 15% tax.
Many foreign portfolio investors earlier described such trades as business income and paid no tax on these. In Derivative trading, as fund manager was located abroad, no permanent establishment was established. This meant derivative trading Are the BRICS Nations Too Splintered to was almost tax-free. This will change with Be a Bloc? the Budget announcement as derivative will be taxed as short-term capital gains. As leaders of the BRICS countries gather for
July 2014
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FinNiche
FUN CORNER
FUN CORNER FinQuiz
Last Week’s Answers
1.
Satoshi Nakamoto described which software-based payment system?
2.
What was the fiscal deficit in the year 2013-14?
3.
Chair of Federal Reserve is ________
4.
BRICS Development Bank headquarter is proposed to be located at ________
5.
What was the overall GDP growth rate in the year 2013-14?
1.
Bridge
2.
Bond
3.
Appreciation
4.
Book Value
5.
Credit
CARTOONS
TRIVIA Apple’s cash and investment are now equal to the GDP of Hungary, and more than that of Vietnam and Iraq
The total asset under supervision for JP Morgan is $2.2 trillion – more than the GDP of India
Starbucks has operations in more countries than both JP Morgan Chase & Goldman
Zimbabwe has experienced the worst inflation in the world – 6.5 sextillion percent in November
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Volume Publisher: Anshul and Saksham
July 2014
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