The Financial Bulletin
FROM THE EDITORS
Money Matters Club IBS, Hyderabad Est..—2005
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Dear Readers, It gives us pleasure to come up with the wrap up 2020 issue of the Financial Bulletin successfully.
2020 was a year of distress for the entire world. On one side, the pandemic was booming, and on the other hand, the financial institutions and markets were perturbed. While some great businesses were shut, others acquired, and some went on acquiring others. The government tried to reduce the Financial distress caused due to the pandemic, and businesses were pumping huge sums of capital into their business. As a routine, the fraudsters were on time, this year we witnessed scams and frauds too, revealing the damaged pillar of ethics of the Financial world. In this issue, we aim to give you a brief description of the happenings of 2020 in the field of Banking, Accounting, Finance, and Taxation. We hope to deliver useful insights to the readers. May this issue be fruitful to each one. Happy reading!
Kritika Gupta Jagriti Gupta Juhi Parasrampuria Saisadwik Chodavarapu Newsletter Coordinators
MENTOR SPEAKS
Dr. M.V.Narasimha Chary (Faculty Coordinator)
India has found a place in the economies with the most notable improvement in Doing Business 2020. Doing Business acknowledges the 10 economies that improved the most on the ease of doing business after implementing regulatory reforms. As in other economies on the list of 10 top improvers, leaders of India adopted the Doing Business indicators as a core component of their reform strategies. Prime Minister Narendra Modi’s “Make in India” campaign focused on attracting foreign investment, boosting the private sector, manufacturing in particular, and enhancing the country’s overall competitiveness. The government turned to the Doing Business indicators to show investors India’s commitment to reform and to demonstrate tangible progress. In 2015 the government’s goal was to join the 50 top economies on the ease of doing business ranking by 2020. The administration’s reform efforts targeted all of the areas measured by Doing Business, with a focus on paying taxes, trading across borders, and resolving insolvency. Given the size of India’s economy, these reform efforts are particularly commendable. The country has made a substantial leap upward, raising its ease of doing business ranking from 130 in Doing Business 2016 to 63 in Doing
Business 2020. On the other hand, India is dropped to 131st position among 189 countries in the 2020 human development index, according to a report by the United Nations Development Programme (UNDP). Human Development Index is the measure of a nation's health, education, and standards of living. All the countries around the world are reeling under the devastating impact of the Covid-19 pandemic. India is aiming to overcome it through the government’s Atmanirbhar Bharat Abhiyan (Selfreliant India Mission) economic package, RBI’s monetary policy, liquidity adjustment facility, and loan moratorium. The sectors like energy, agriculture, manufacturing, ecommerce are the worst hit during the pandemic. We could see drastic costcutting measures adopted by the large Indian firms. Government revenue has been severely affected by tax collection going down, and as a result, the government has been trying to find ways of reducing its costs. The insurance sector has experienced an increase in insurance penetration and insurance density. Investments in National Pension Scheme have increased a lot. While the new FDI policy does not restrict markets, the policy ensures that all FDI from countries that share a land border with India will now be under the scrutiny of the Ministry of Commerce and Industry. The Indian government has offered incentives worth ₹40,995 crores (US$5.7 billion) for electronic manufacturing and extended a fund of ₹15,000 crores (US$2.1 billion) for the healthcare sector. Indian Prime Minister has announced an overall economic package worth ₹20 lakh crore (US$280 billion). The income tax depart-
ment has extended the last dates for filing GST returns and income tax returns. The Reserve Bank of India (RBI) Governor made several announcements including EMIs being put on hold for six months and reducing repo and reverse repo rates. RBI announced more measures to counter the economic impact of the pandemic including ₚ50,000 crores (US$7.0 billion) special finance to NABARD, SIDBI, and NHB. Providing more relief to the state governments, WMA limits have been increased by 60%. Public Sector Banks (PSBs) are the mainstay of the Indian banking industry. PSBs and PSB-sponsored Regional Rural Banks (RRBs) have a dominant market presence and constitute the major proportion of the bank network of Scheduled Commercial Banks (SCBs), particularly in rural and semiurban areas. PSBs play an important role in fuelling investment needed for the country’s economic development. Root causes of weaknesses in PSBs have been systematically addressed through the annual EASE Reforms Index for FY 19 and FY 20 (EASE 1.0 and EASE 2.0). These have equipped Boards and leadership for effective governance, instituted risk appetite frameworks, created technology and data-driven risk assessment and prudential underwriting and pricing systems, set up loan management systems for faster processing and tracking, introduced Early Warning Signals (EWS) systems and specialized monitoring for time-bound action in respect of stress, put in place focussed recovery arrangements, and established outcome-centric HR systems. Both public and private banking sectors are strengthened by reforms on financial inclusion and by increased service initiatives. Bilateral Netting of Qualified Financial Contracts Act, 2020 has been notified on 1 Oc-
tober 2020 to ensure financial stability and promote competitiveness in Indian financial markets by providing enforceability of bilateral netting of qualified financial contracts and for matters connected therewith or incidental thereto. The legislation provides a regulatory framework to offset claims between two parties to a financial contract and to determine a single net payment obligation. Netting helps financial institutions measure credit exposure to a counterparty on a net basis (as opposed to a gross basis). This helps reduce credit risk exposure and systemic risk in the financial market in the event of default of a counterparty, contributing to overall financial stability. The market regulator SEBI has introduced various measures like allowing mutual funds to borrow beyond the existing limit of 20% of the net assets of the scheme, on a case-to-case basis, for scheme/s facing heightened redemption pressure to meet temporary liquidity needs. Additionally, relaxations have been provided regarding compliance requirements pertaining to Mutual Funds. Strengthening Financial Inclusion in the country has been one of the important developmental agendas of both the Government of India and the four Financial Sector Regulators (viz. RBI, SEBI, IRDAI, and PFRDA). Financial literacy supports the pursuit of financial inclusion by empowering the customers to make informed choices leading to their financial well-being. The National Centre for Financial Education (NCFE) in consultation with the four Financial Sector Regulators and other relevant stakeholders has prepared the revised National Strategy for Financial Education (2020-2025). The combination of fiscal, monetary, and administrative measures will create conditions that will enable a gradual economic revival going forward.
CKP Co-operative Bank Failure The C.K.P. Co-op Bank Ltd was a leading bank in the Co-operative Banking Sector in Mumbai which was founded in 1915. Its headquarters are in Matunga, Mumbai. Ill-fated action plan In April 2015, NPA of the Bank stood at Rs. 228.41 crores and it planned to recover a minimum of Rs. 70 crores from major defaulters. The bank had recovered Rs. 47.56 crores from this target by January 2016. This goal was reduced to Rs. 60 crores for FY 2016-17 and the recovery objective was Rs. 54 crores for FY 2017-18. As of April 2020, 97% of the bank's loan book was dominated by Gross Non-Performing Asset (GNPA) in its deposits, with just Rs. 4 crores of its Rs. 158 crore loan book being graded as ‘Standard’. The management also pleaded with the RBI, in the action plan, to lift the withdrawal limit to Rs. 5,000, which on May 3, 2014, was capped to Rs. 1,000 under Section 35 of the Banking Regulation Act. Depositors would redeem their accumulated interest as share capital, helping to minimize the bank's negative net worth. The ill-fated conversion scheme attracted Rs. 8 lakh worth of capital. Revival 2.0 In January 2016, depositors were allowed to withdraw Rs. 10,000 on the part of the RBI and the bank also secured a six-month extension until 31st July 2016. The bank had recovered 67% of its target of Rs. 70 crore for FY 2015-16. Furthermore, CKP Co-Operative Bank added that a fair period of 3 years was needed for recovery as it had secured securities backed mortgage loans of Rs. 367.98 crore. The bank also requested permission to undertake new deposits and share capital as well as a waiver of a penalty levied by the Rs. 1.52 crore RBI due to the default on the limits of the Cash Reserve Ratio (CRR) and Regulatory Liquidity Ratio (SLR). Bank demanded permission to sell its administrative headquarters with a market valuation of Rs. 13 crore, the proceeds of which the bank indicated would be used to "invest in government securities and earn revenue." They also demanded that RBI be permitted to benefit from the Strategic Debt Restructuring (SDR) scheme.
The Realty Angle As of March 2018, the bank had a cumulative outstanding sum of Rs. 209 crore, of which, approximately 51% (i.e. Rs. 106 crore) of exposure was to realtors who had been declared as wilful defaulters since then. As of May 2020, this exposure to real estate ballooned to 60%. As of the outstanding loan book of Rs. 158 crore, nearly Rs. 85-90 lakh was exposed to the real estate market. Final Decision The RBI agreed to put the shutters on the ailing bank by cancelling its license and mentioned the following to support its decision. The financial position of the bank, RBI said, is highly adverse and unsustainable and there is no concrete revival plan or proposal for a merger with another bank. The bank did not satisfy the requirement of 9% minimum capital and reserves. It is also not in a position to pay its present and future depositors. The bank's financial situation is exceedingly unfavourable and unsustainable and there is no concrete turnaround strategy or merger proposal with another bank. The provision for minimum capital and liquidity does not satisfy the bank. It is not in a position to pay its existing and potential depositors either. As the Deposit Insurance and Credit Guarantee Company (DICGC) offers a cover of Rs. 5 lakh for each depositor, 1,130 CKP Co-operative Bank customers face a risk of losing their deposits. The overall sum of 1,130 depositors is Rs. 120.45 crore, of which Rs. 58 crore is insured by individual depositors lower than Rs. 5 lakh.
By– Umang Goenka
New Dividend Policy for NBFCs A dividend policy is a policy used by a company to structure its dividend payout to the shareholders. It is a part of the policy of a company's strategy. There is no obligation for the company to pay dividends to its shareholders. Even though investors know companies are not liable to pay dividends, many consider it a bellwether of the financial health of that particular company. It is seen as an integral part of their corporate strategy. Dividend payments are influenced by the management i.e. dividend amount, timing, and other various factors. A stable dividend policy, a constant dividend policy, and a residual dividend policy are three types of dividend policies. New policy According to the draft circular released by the central bank, including the accounting year for which it proposes to declare a dividend must comply with these policies: NBFCs must have a CRAR of at least 15% for the last 3 years. After which, a company can declare dividends with a payout ratio of up to 50% or 15-50 % as per the matrix suggested by the RBI. In the past three years, the net NPA ratio should be less than 6%. In the previous two years, if the capital adequacy and leverage norms are not met in the relevant NBFCs, they will be entitled to pay the dividend if the required regulatory CRAR and their net NPA is less than 4%. Leverage ratio should be less than 7% and Core Investment Company (CIC) must have adjusted net worth of at least 30% of its aggregate risk-weighted assets on the balance sheet and risk-adjusted value of off-balance sheet items for Non-Systemically Important Non-Deposit taking NBFC for past three years. For calculating the payout ratio, profit shall be computed after excluding any extraordinary items. Furthermore, the financial statements relating to the year for which dividend is declared by the NBFC should be free of any qualifications by the auditors, which have an adverse bearing on the profit during that year. In case of any qualification to that effect, the net profit has to be adjusted suitably for computing the payout ratio.
The dividend should be payable only out of the current year's profit. There should not be any explicit restrictions on the NBFC on the declaration of dividend by the RBI. Impact on NBFC At least two non-banking finance firms (NBFCs) — Mahindra and Mahindra Financial Services (MMFS) and LIC Housing Finance — may be excluded from dividend payment, LIC Housing Finance, which has been grappling over the last couple of years with lower capital adequacy, fails to attain the first benchmark of minimum 15% capital adequacy. However, as per an exception provided by the RBI, if it raises capital during the current year, the company could pay dividends. Mahindra Finance also does not comply with net NPA requirements (4.7% as of September 2020 against required 4%), however, stronger recoveries during FY 2020-21 may allow the company to use this exception. Most of them are unlikely to be affected by the current dividend payment strategy for non-banking lenders because their payout rates have been floating at 10-20 for the past three years.
By— Umang Goenka
Negative Yield Bonds Negative-yield bonds are debt instruments that provide the investor with a maturity amount of less than the acquisition price of the bond. These are usually issued by central banks or governments, and investors pay interest to the borrower to keep their money with them. The investors buy negative-yield bonds because these attract investments during times of uncertainty as investors look to guard their capital. At a time when the world is battling the COVID-19 pandemic and interest rates in developed markets like Europe are much lower, investors are trying to find relatively better-yielding debt instruments to safeguard their interests. The 10-year and 15-year bonds are offering positive returns and are maybe a big attraction when interest rates in Europe have dropped significantly. As against negative 0.15% yield on the 5-year bond issued by China, the yields offered in safe European bonds are much lower, between - 0.5% and - 0.75%.
Also, while most of the large economies are facing a contraction in their GDP for FY 2020-21, China is one country which has started to witness positive growth in these challenging times. Its GDP expanded by 4.9% in the third quarter of the year 2020. European investors are also looking to expand their exposure in China, and hence, there is an enormous demand for these bonds.
The key factor behind driving this demand is the massive amount of liquidity injected by the global central banks after the pandemic began which drove up prices of various assets including equities, debt, and commodities. Banking industry sources said that many investors could also be temporarily parking money in negative-yielding government debt for the purpose of hedging their risk portfolio in equity instruments. In case the fresh wave of the Covid-19 pandemic leads to further lockdowns of economies, then there could be further negative pressure on interest rates, pushing yields down further, and leading to profits even for investors who put in money at the current juncture. Global central banks have injected an estimated more than $10 trillion of liquidity through various instruments in the financial system — which is finding its way into various assets in the economy. There is an expectation that the new US government may impose fresh lockdowns in the economy as COVID-19 cases are increasing in various US states and European countries, whereas China seems relatively safe now from that perspective. This is expected to lead to volatility in the financial markets in coming days, pushing up demand for the safety of capital alongside flows into risk assets. It is anticipated that the institutional investors would look at the overall returns after factoring in the sharp gains from equities and commodities and discounting the negative returns on capital being used for the purpose of hedging. As per one of the recent reports, the world’s negative debt pile has hit a record of $18 trillion.
By— Abhiruchi Dawra
Monetary Policy A monetary policy of a country can be defined as a macroeconomic policy that facilitates the flow of money supply in an economy. In India, RBI is responsible for formulating such policies with the help of various tools such as adjustment of interest rates, purchase or sale of government securities, and controlling liquidity in the market. The major objective of monetary policy is to maintain price stability and controlling liquidity in the economy thus playing a vital role in the growth of the nation. The RBI implements the monetary policy through various instruments such as open market operations, bank rate policy, reserve system, credit control policy, moral persuasion, and many more.
Monetary Policy Committee As per the Section 45ZB of the amended RBI Act, 1934, the Central Government established the Monetary Policy Committee (MPC). The first meeting of the MPC was held on 3rd and 4th October 2016. The committee is responsible for deciding various policy rates like Repo Rate, Reverse Repo Rate, MSF and Liquidity Adjustment Facility, etc. The MPC consists of six members, including three officials of the RBI and three external members appointed by the Government of India. The MPC determines the policy rates to achieve the inflation target and to improve the financial health of the country. The chairperson and ex officio of the committee is the Governor of the RBI. Decisions are taken by the majority of votes and in
the event of a tie, the Governor has the casting vote to finalize the decision. The current statute of the committee is to maintain 4% annual inflation until 31st March 2021, with an upper tolerance of 6% and a lower tolerance of 2%. Implementation of Monetary Policy Open market operations, bank rate policy, reserve system, credit control policy, moral persuasion, and with the help of various other instruments RBI implements the monetary policy. Adoption of these instruments will result in changes in the interest rate or the flow of money in the market. Types of Monetary Policy Expansionary (Easy money) - Monetary policy designed to counteract the consequences of the recession and return the economy to full employment. Contractionary (Tight Money) - Monetary policy designed to counteract the consequences of inflation and return the economy to full employment. Monetary Policy Of The Year 2020 The policy rate was maintained at 4.00%. Real GDP growth projection has been revised by RBI to -7.5%. Repo Rate remained unchanged at 4.00%. Reverse Repo Rate stands at 3.35%, the bank rate at 4.25%, and CRR at 3%. Retail inflation is projected to be between 2.7% - 3.2% in the Oct-Mar quarter. The Statutory liquidity ratio (SLR) stands at 18% and Marginal Standing Facility (MSF) stands at 4.25%. Rationalisation of personal income tax rates in the FY 2020-2021 Budget to support domestic demand. The current scenario calls for an adjustment in interest rates on small saving schemes and outlined regulations for housing finance companies are to be issued. Fiscal discipline is imperative to create space and crowd in private investment. Lower rabi sowing might affect agricultural and rural demand.
By— Astha Sristi
Citibank Blunder 2020 was no good for the Indian and global banks. Where other banks were in the news for announcing new estimates of the economy, Citibank was in the news for a reason that no one could have ever imagined. Citibank was acting as an administrative agent for cosmetic company Revlon Inc.’s loans. As an administrative Citibank was responsible for the timely payment of periodic interest payments to a group of Revlon’s lenders. In August 2020, the bank was supposed to make a payment to the lenders’ group but instead of paying the regular interest amount, Citibank transferred the entire principal amount of the loan amounting to $900 mn, due to an error on the banks end. To add to this problem, the bank also noticed that the amount was transferred from their own account and not from Revlon’s account. Citibank asked the lenders to return the money out of which few of them agreed but remaining lenders did not react for this. Brigade Capital is one of the beneficiaries that refused to pay the money. The Principle of Unjust Enrichment “This happens when someone pays money to another individual under the unfounded belief that he is liable to pay the amount. And in the event such a transaction does transpire, the law imposes an obligation upon the recipient to pay back the complete money.“ According to the application of unjust enrichment principle, Citibank is entitled to receive its money back from Brigade Capital. The complication here is that Revlon is liable to pay money to Brigade Capital. In 2016 Revlon acquired Elizabeth Arden cosmetics Brand, and Brigade capital financed part of the $ 1.8 billion loan deal for acquiring the company. Here, Citibank has to collect payments and transfer it to lenders. On this basis, Brigade Capital contests that this is prepayment done by Citibank. Brigade Capital does not want to return the money as Revlon is struggling financially and Revlon can default them soon. Federal court verdict After Brigade Capital refused to pay the money back, Citigroup sued this company in Federal court and made an upper hand. After listening to both parties arguments the judge gave a decision favouring Citigroup. The amount of $ 175 million was frozen ( can’t withdraw, transfer or dispose of) for Brigade Capital. By— Siddartha Molleti
Transstroy India Scam Transstroy India, an infrastructure firm headquartered in Hyderabad, has been searched by the Central Bureau of Investigation (CBI) for allegations of theft and lending by a consortium of banks. The sums are enormous. The Scam Transstroy India had submitted fake documents, claiming that they had built dams and irrigation projects in Kazakhstan, Russia, and China for the ill-fated Polavaram irrigation project. According to estimates, the company had made purchases worth Rs. 2,500 cr. and as per the auditor EY (Ernst & Young), the total purchases made is only Rs. 270 cr. The company failed to furnish more details about the purchases that the company claimed as expenses. The company purchased multiple machines with identical engine serial numbers from two different vendors. In another instance, CBI investigators discovered that the company had delivered several metric tons of materials using two-wheelers. They have also paid Rs. 7 cr. for gold and silver articles, merely as donations. It was found that Rs. 15.34 cr. was transferred to Transstroy Singapore PTE Ltd., a subsidiary of Transstroy India Ltd., without the permission of BOB (lender). The case revolves around diverting public funds for private gains. There were irregularities in foreign exchange transactions. Fictitious companies were formed and maids, sweepers, and drivers were named as directors of the company. Directors Statement Any wrongdoing was denied by the chairman, MD, and CEO of Transstroy India. It was communicated that there was no scam in the sector and the company would not pay the money because the Government of Andhra Pradesh overnight invoked and encashed their bank guarantees worth over Rs. 900 cr. in the Polavaram irrigation project and that is why the account has become an NPA. The political aspect associated with the case was also anticipated. The Money-Side of The Scam In 2013, a consortium was formed of 14 banks with Canara Bank as a leader to lend Rs. 4,765.70 cr. The amount of lending made by all 14 members of the con-
sortium is Rs. 4,765.70 cr. out of the Rs. 7,926.01 cr. fraud amount appearing in the press note of which Canara Bank has a share of Rs. 678.28 cr. The company was already declared as a wilful defaulter by Canara bank on December 26, 2018. It was recently declared as fraud and reported on February 10, 2020, to the RBI. Canara Bank had made 100% provision for this account as per the prescribed prudential norms. The FIR was registered as a result of a lawsuit by Canara Bank, the head of the lenders' consortium. ED is investigating claims that the organization has diverted money in breach of FEMA laws to Singapore and Russia. ED is also reviewing the affairs of Polavaram Project Transstroy, a joint venture firm, and JSC EC UES. The company's chairman-cum-managing director, Cherukuri Sridhar; its additional director, Mr. Rao; and another additional director, Akkineni Satish, are among those named as defendants in the lawsuit. Many who have been monitoring the banking sector and loans to the infrastructure sector consider that Transstroy India has raised questions on the existing provisions and placed the new provisions into view.
By— Umang Goenka
IL & FS Crisis The Backstory The case starts from a series of frequent defaults by IL & FS in 2018, which led to a financial crisis in India's financial markets. To avoid any contagion the Government urged to take charge of the company. The SFIO, registrar of companies, the Ministry of Corporate Affairs, and the Institute of Chartered Accountants (ICAI) were then directed by the Government to inspect the alleged involvement of the auditors. The accounting regulator, ICAI, conveyed in its interim report of December 2018 that auditors failed to report the critical mismatch between assets and liabilities and also the primary indicators were ignored which suggested a liquidity concern in the balance sheet. Deloitte was appointed as the statutory auditor of IL&FS Ltd. between FY 2006-07 and FY 2016-17 and BSR was given the responsibility of joint auditor for FY 2017-18. After nine months of investigation, the SFIO concluded that the auditors were involved in falsifying the books of accounts and the financial statements between 2013 and 2018. A criminal case was filed against the partners and officials of the audit firms and they were accused of criminal conspiracy under the Indian Penal code. To seek a five-year ban on the auditors as per Section 140(5) of the companies act 2013, the Government moved the case to NCLT. The auditors were also alleged of oppression and mismanagement cases against IL&FS. The government’s move was challenged by Deloitte and BSR and they argued that as per the law the removal of an “existing” auditor is possible only after the final order alleging fraud is passed from NCLT. It was argued the NCLT lacked jurisdiction as they had already resigned and the challenge was dismissed in August last year. BSR moved to the Bombay High Court and challenged the constitutional validity of Section 140(5) and demanded that all allegations against them should be revoked. Interim relief was granted to Deloitte Haskins and its audit partners by the Bombay High Court. Auditor’s Arguments The proceedings were started by SFIO’s on the basis of a 32,000-page interim report and permission was granted by the Ministry of Corporate Affairs after a day it was submitted. This indicated that the Government proceeded “hastily”.
Section 140(5) is unconstitutional and it does not offer any differentiation against existing and previous auditors and does not safeguard the wellbeing and interests of auditors. Even after the auditors resigned on the basis of a “deeming fiction”, proceedings were initiated against them by NCLT. They argued that NCLT lacked jurisdiction to exercise such powers which can be only exercised by the high courts.
NCLT dismissed the plea of Deloitte and KPMG auditors stating the following arguments :Court’s Verdict Section 140(5) is constitutional and does not suffer from any procedural discrimination as argued by the auditors of Deloitte and KPMG. SFIO’s argument about the investigation report itself demonstrates “absence of application of mind to relevant facts'' which have a bearing on the investigation. The court argued that not even a single instance of financial bungling was fully investigated and the SFIO report itself indicated that it needed further investigation into certain matters.
The sanctions issued by the Government for initiating prosecution against BSR, its audit partner, Deloitte Haskins and its audit partners are untenable in law and were thus set aside. The resultant proceedings at the NCLT and sessions were also quashed. Prosecution against the former Vice President of IL&FS was also quashed as it was initiated pursuant to the Government’s sanction order. Recent Developments Deloitte India is planning to review the written order and after that further course of action would be decided and which may include an appeal. The firm is arguing that the auditors cannot be treated as part of the management which is the responsible authority to manage affairs of the company and therefore should not be charged. The firm will continue to protect its position which would be supported by proper facts and the firm will remain committed to high standards of quality audit ethical conduct in its practice.
By— Astha Sristi
FinCEN Files On 20th September 2020, some files containing data relating to some banking transactions were leaked. These files exposed some of the largest banks of the world, signifying that they had been aware of cases of money laundering, corruption and fraudulent activity, that amounted to $2 tn. worth of transactions over 18 years, between 1999 and 2017. These files were named as FinCEN Files. Wondering what FinCEN Files are? FinCEN stands for Financial Crimes Enforcement Network, which is a part of the United States of America's Department of the Treasury that was established on April 25, 1990. The network’s function is to collect information about financial transactions and scrutinize it to prevent domestic and international money laundering, terrorist financing, and other financial misconducts. The FinCEN files consist of 2,657 documents, dating from 1999 to 2017, that banks sent to the US authority. These documents contain Suspicious Activity Reports (SARs) that banks and other financial institutions submit to FinCEN of the US Treasury Department when certain transactions are considered as money laundering or any other illegal activity. These documents are not considered as evidence of a crime committed, but they can support investigations, intelligence gathering and be further indicative of compliance processes in place. Now, why does it matter? Laundering money is the process where black money such as the proceeds of crimes like drug dealing or corruption are deposited into an account at a respected bank where it will not be associated with the crime. Banks are supposed to make sure they don't aid their clients in any way to launder money or to process it around in ways that break the legislated rules. In accordance with the law, banks must know their clients, it's not sufficient to file SARs and keep processing the money from clients while expecting the authorities to deal with the problem. If they have evidence of criminal activity, they should stop moving the cash and terminate the transaction. FinCEN files highlighted the extraordinary amounts of money involved and cover about $2 trillion of transactions which are only a tiny proportion of the SARs submitted over the period.
Global Revelations HSBC allowed swindlers to move millions of dollars of stolen money around the world, even after it came to know that the scheme was a scam from US investigators. JP Morgan allowed a company to transact more than $1 bn. through a London account unknowing of its ownership. The bank later discovered that a mobster, who was on the FBI's 10 most wanted list, might be the owner of the company. One of the closest associates of the Russian President Vladimir Putin, to avoid sanctions which were meant to stop him using financial services in the West, used Barclays bank in London. Evidence suggests that a certain amount was used to buy works of art. A donation of £1.7 mn. to the UK's governing Conservative Party by a woman's husband was found to be secretly funded by a Russian oligarch with close ties to President Putin. By the intelligence division of FinCEN, the UK is called a "higher risk jurisdiction" and compared to Cyprus. That's because over 3,000 UK companies are named in the FinCEN files which is more than any other country. The Central Bank of The United Arab Emirates was not successful to act on the cautions of a local firm helping Iran evade sanctions. Deutsche Bank moved money launderers' black money of many money launderers, for organised crime, terrorists, and drug traffickers. For more than a decade, Standard Chartered moved cash for Arab Bank, after the accounts of clients at the Jordanian bank had been used in funding terrorism. Why is this leak different? Some of the recent leaks include: Paradise Papers, 2017 - A huge batch of leaked documents revealing the offshore financial dealings of politicians, celebrities and business leaders, leaked from an offshore legal service provider, Appleby, and corporate services provider, Estera, who operated together under the name Appleby until 2016 as Estera became independent in that year. Panama Papers, 2016 - The law firm Mossack Fonseca’s documents leaked showing how wealthy people were using offshore tax regimes to their advantage.
Swiss Leaks, 2015 - Documents from HSBC's Swiss private bank revealed its way of using the country's banking secrecy laws to help clients in tax-evading. Lux Leaks, 2014 - The accountancy firm, PricewaterhouseCoopers’ documents leaked. revealing how big companies were using tax deals in Luxembourg to reduce the tax amount. The FinCEN papers are unlike because they are not just documents from one or two companies, rather they comprise many banks. They highlighted a variety of potentially suspicious movements involving companies and individuals and also raised questions about why the banks which had noticed these movements did not act on their concerns. The Aftermath The FinCEN Files provided a final push in Washington, DC, for passage of a significant new law aiming for the most effective money laundering tools. The legislation passed The Corporate Transparency Act marking the most extensive revision to anti-money laundering laws since the Patriot Act in 2001. The reforms include the yearly reports filing by the Justice Department, justifying its use of deferred prosecution agreements that allowed the banks to avoid trial and criminal convictions even though being guilty of fouling the anti-money laundering laws. The US Treasury Department would also seek new technologies to better categorize criminal money movements and to increase communication between the private sector and federal agencies. Those blowing the whistle on wrongdoing would get new protections.
By— Bhaveshri Shah
Currency Swap A currency swap is a process which includes exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on a similar loan in another currency. Instead of borrowing from the market, a currency swap agreement allows a country to get foreign currency loans at better interest rates, and repayment is done at the exchange rate fixed at the time of borrowing and the transaction terms are also set-in advance. This type of agreement helps remove the risks arising due to fluctuations in exchange rates and also provides the country, which is getting the dollars. These reserves can be used at any time in order to maintain an appropriate level of balance of payments or short-term liquidity. There are also other objectives that the Government keeps in mind during Currency Swaps agreements including the promotion of bilateral trade, maintaining the value of foreign exchange reserves with the central bank, and ensuring financial stability along with protecting the health of the banking system. Agreement Between the RBI and the Central Bank of Sri Lanka On July 27, 2020, The RBI signed a Currency Swap Agreement for providing $400 mn. to Sri Lanka to enhance the foreign reserves and safeguard the financial stability of the country, which is severely affected due to the COVID-19 pandemic. According to the terms mentioned in the agreement, the Central Bank of Sri Lanka can make drawings of USD, Euro or INR in multiple tranches up to a maximum of $400 mn. or its equivalent.
This agreement is sealed under the South Asian Association for Regional Cooperation (SAARC) Currency Swap Framework 2019 – 2022. The same would be valid from 14th November 2019 to 13th November 2022. RBI, in accordance with this framework, will continue to offer swap arrangement within the overall corpus of $2 bn. The SAARC currency swap framework came into operation on 15th November 2012. With the objective to provide a backstop line of funding for short term foreign exchange liquidity requirements or short-term balance of payments stress till longer-term arrangements are made. The RBI, in accordance with the terms and conditions of the framework, would engage in bilateral swap agreements with SAARC central banks, who want to benefit from the swap facility. This facility is available to all countries that are members of SAARC, subject to their signing the bilateral swap agreements. Reasoning And Conclusions After the Covid-19 pandemic, due to the devastated tourism industry of Sri Lanka, it has made several requests for assistance from India. These came against the backdrop of the country’s economy slowing down, comparable that of many other countries. The declining dollar reserves of Sri Lanka resulted in an increase of the foreign exchange outflows and it supplemented the burden on the Sri Lankan rupee. The action of Reserve Banks of India trails a current bilateral technical discussion on rescheduling Colombo’s outstanding debt repayment to India. Sri Lanka would also enable, protect, and encourage a liberal ecosystem for Indian investors. The currency swap agreement with Sri Lanka echoes the commitment of India to help its friendly neighbour with its economic restoration amidst the pandemic.
By— Bhaveshri Shah
The Franklin Templeton Case The Franklin Templeton Mutual fund voluntarily closed its six debt schemes due to liquidity crisis and panic in bond markets as a consequence of COVID19 crisis. The six debt funds are as follows: Franklin India Low Duration Fund Franklin India Dynamic Accrual Fund Franklin India Credit Risk Fund Franklin India Short Term Income Plan Franklin India Ultra Short Bond Fund Franklin India Income Opportunities Fund This resulted in locking in investor’s wealth of Rs. 30,000 crores. An RTI revealed that Franklin Templeton didn’t take approval from SEBI before winding up its six debt schemes. Before shutting down its scheme, the country's oldest asset management company (AMC) argued that it had taken permission from SEBI. A plea was filed in Gujarat’s High Court seeking to demand a stay on for the liquidation process of six debt schemes. It was found through the RTI that SEBI had not granted any permission to Franklin Templeton to wind up the schemes. The company argued that the decision to wind up the schemes was done in accordance with regulation 39(2)(a). In the month of June 2020, the Gujarat High Court promulgated a stay order on Franklin Templeton’s e-vote on liquidation of debt schemes that was scheduled on June 9 to June 11. Kotak Mahindra bank was appointed to supervise the winding up of six debt schemes.
By— Astha Sristi
Google for India Digitisation Fund On 13th July 2020, Sundar Pichai, the CEO of Google, announced “Google for India Digitisation Fund”. Google will invest this fund in India, over the next 5-7 years. How will the investment be done? The investment will be done by a mix of equity investments, partnerships, and also in operational, infrastructure and ecosystem investments. The 4 point agenda for the investment is1. Enabling affordable access and information for every Indian in their domestic language. 2. Building relevant products and services based on India’s unique needs. 3. Digital Transformation for empowering business. 4. Leveraging technology in areas like health, education, and agriculture. Previous Investment of Google in India Google invested in various startups through various methods. Some of the investments are shown below: Dunzo - $ 45,000,000. Cuemath - Online education portal. - 39 cr., Agastya International Foundation - 3 cr., Sana Ventures - 3.13 cr Big Techs Outlook in India India is the second-largest internet market by several users. The major tech companies like Facebook and Amazon are likely to invest more in seeing the huge market.
By— Siddartha Molleti
By— Avinash Pandey and Umang Goenka
Digital Service Tax Equalisation levy commonly known as digital tax or Google tax was imposed by the Indian Government on digital companies on 1st June 2016 levied at 6% payable on gross revenues from online advertising services. Its main objective was to impose a tax on digital companies which were permanently established outside India with the main source of income being advertisement. Companies without having a physical presence in India, but having a digital presence, earlier did not come under the taxation framework, have now been brought under local tax laws through digital taxation. In addition to the equalization levy, India introduced the concept of “Significant Economic Presence” (SEP) for the purposes of corporate income tax, which includes: An advertisement which targets a customer living in India or who has access to the advertisement through Internet Protocol (IP) address located in India. Sale of data obtained from a person living in India or using an Indianbased IP address. Selling of products or services by means of data collected from a person residing in India or who uses an Indian IP address. Coordinated attempts to tax digital business models are reflected by the idea of SEP with Equalization Levy. How Did It Originate? India being the second-largest online users in the world, with over 560 million internet users, therefore, from the perspective of its tax revenue base, digital businesses could not be neglected. However, as is the case in other areas, Indian tax laws were suited for conventional business models which had a physical presence which needed to be updated. Implications on India Companies without a physical presence in India but earning revenues from Indian customers, were no longer able to evade tax by moving their offices to tax havens. Digital taxation provides a field to both domestic and international companies which have an unfair competitive advantage over small or medium enterprises and start-ups. Additionally, the e-commerce market is expected to grow to $200 billion by 2026 and will substantially increase revenues for the Indian
Government. On the other hand, the imposition of digital taxes may strain trade relationships with countries especially the USA, which is a home-ground for most digital giants like Google, Netflix, Amazon, etc. This taxation framework is likely to adversely impact start-up companies during their preliminary growth and expansion stages. Further, higher taxes are likely to hinder advancement and companies will most likely pass on part of this tax to end-users and/or to sellers.
The Road Ahead India expanded the scope of the Equalisation Levy, or digital tax, to the sale of goods and services in the country by overseas e-commerce firms. The requirement to tax internet businesses, such as Amazon, Google, and Netflix, arises when they receive digital revenue from countries where they do not have a significant business presence, known as Permanent Establishments (PE) in the tax jargon. These are new-age companies, which use virtual infrastructure to operate in another country. The need to tax the profits generated by such corporations in a specific jurisdiction has been felt by countries around the world. Under the aegis of the Organisation for Economic Cooperation and Development (OECD), talks started in 2018 to formalize a process for whether and how to tax profits received by such companies in a region where they do not have a physical or substantive presence. But an unexpected decision by the US to withdraw from the talks,
including 137 countries, and threats of retaliatory measures against digital tax collectors. For India, as the country has already been at the forefront of embracing the idea of taxing international digital firms, it causes confusion. It is now the focus of a US-initiated probe. With effect from April 1, 2020, the Income-Tax Department has informed the annual registration and appeal forms for e-commerce operators needed to pay the equalization levy, usually referred to as 'Google tax.' By the due dates of July 7, October 7, January 7 and March 31, e-commerce firms must pay the levy in four instalments. The 'Google fee' was originally applicable to payments for digital advertising services earned by non-resident companies without a PE here, provided they exceeded 1 lakh per year. The tax rate was 6%. The businesses using the facilities were obliged to deduct the sum of the tax. The Government extended the reach of the tax in the FY 2020-21 Budget by adding e-commerce firms. The effective tax rate is 2% (plus a surcharge) on the amount of consideration that an e-commerce operator receives/receives. This has been in place since 1 April. The legislation says that this levy would not extend to any e-commerce operator that has a PE in India that produces/provides/facilitates e-commerce supplies or services.
By— Abhiruchi Dawra
By— Astha Sristi & Avinash Pandey
By— Siddartha Molleti
By— Siddartha Molleti
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