NEW DELHI l MONDAY l JULY 2 l 2012 V O L X X X V I I I N O 1 0 6 1 2 P A G E S I R s 4 . 0 0 READ TO LEAD P 3 C O R P O R A T E S SHOPPERS STOP’S SHRIKHANDE AIMS TO SCRIPT REVIVAL WITH PVT LABELS, HYPERCITY RECAST P U B L I S H E D In the news Drought of deals for IT companies As clients prefer smaller, short-term contracts, the days of $100-millionplus offshoring deals are a thing of the past, report PP Thimmaya & Debojyoti Ghosh in Bangalore. Companies like Infosys and Wipro have already informed analysts about the disappointing trend. ■ P3 Late debut likely for rail service tax The finance ministry may defer service tax on railway AC travel and freight, planned from July 1, by up to 2 months after the railway ministry sought time to upgrade its accounting system for Cenvat credit. ■ Page 2 Diesel cars fare best in glum mkt With the widening petrol-diesel price difference, diesel cars bucked the trend in a gloomy market in June. While Tata Motors sales fell 3%, M&M and Toyota Kirloskar sold 15% and 22% more, respectively. ■ P2 Home loan interest subsidy on cards To support housing for low-and middle-income groups, the Centre is set to give relief in the form of 1% interest subsidy on housing loans up to R15 lakh where the house costs up to R25 lakh. ■ P2 EDIT P8 The need for a technician FM In the prevailing circumstances, handling the fiscal problems in the country require a technical approach M Govinda Rao F R O M : A H M E D A B A D P 10 Foreign investors still B A N G A L O R E upbeat on India C H A N D I G A R H C H E N N A I H Y D E R A B A D K O C H I K O L K A T A PM’s FM stint may see more of Keynes in animal spirits avatar ■ Retrospective tax changes to stay as govt focuses on investment spending KG Narendranath New Delhi, July 1 CALIBRATED STEPS R UMOUR mills might churn but Prime Minister Manmohan Singh, who has assumed the finance portfolio, won’t risk the political cost of having to appear defying Parliament and give a special waiver for British telecom major Vodafone in the high-profile tax case. He might, however, relax the contentious General Anti-avoidance Rules (GAAR) a bit and, more importantly let the government’s invest, ment-type spending gather some steamtobuoythefalteringeconomy . Highly placed sources told FE that Singh is hawkish on growth andmightevenbewillingtotolerate a calibrated amount of slippage with regard to the 5.1% fiscal deficit target for the current fiscal. With the economic slowdown, this target anyway had started looking more difficult than when the Budget was presented, these sources reckon. The idea is to slightly loosen the griponpublicexpenditureandfocus on boosting investment rather than consumption (a contrast to the postLehman stimulus package that essentially drove consumption). This strategy is also in line with New Delhi closing ranks with the anti-austerity faction at the recent G20 sum- ■ Prime Minister Manmohan Singh might relax the contentious General Anti-avoidance Rules (GAAR) a bit ■ Might be willing to tolerate calibrated amount of slippage with regard to 5.1% fiscal deficit target for 2012-13 ■ Might slightly loosen the grip on public expenditure & focus on boosting investment rather than consumption ■ Loosening of purse strings may give infrastructure projects a leg-up Manmohan Singh, Prime Minister mit held at Los Cabos, Mexico, the sources,whoarepartof Singh’score team for the economy said. , Thesourcessaidtheretrospective amendmentstotaxlawswouldnotbe relaxed for Vodafone or any other particular company as these are “general amendments”, not casespecificproposals.Whatthisimplies is that in its fight to ward off the tax demand over its 2007 acquisition of HongKong-basedHutchisonWhampoa’s mobile operations in India, Vodafone should not look for anything beyond a waiver of penalties and/or interest. The government is clear that the fundamental principle that the company is liable to pay tax in India for the deal will be upheld. ■ Welfare schemes like the MGNREGS might see some curbs in their outlay The fact that the Opposition had endorsed these amendments in Parliamentmakesanyrelaxationonthis front unfeasible. “There cannot be a situation that somebody will make money on an asset located in India and will not pay tax either in India or to the country of its origin,” former finance minister Pranab Mukherjee had said in his reply to the Budget 2012 debate. This position would be maintained,thesourcessaid. The draft guidelines on GAAR issued by the finance ministry last week said, “Where an FII (foreign institutional investor) chooses to take a treaty benefit, GAAR provisions may be invoked in the case of the FII, but would not in any case be Sebi may up expense ratio for revival of MF industry Sunny Verma New Delhi, July 1 T HE Securities and Exchange Board of India(Sebi)isunlikely to restore entry loads on mutual funds but may increasetheexpensescharged byfundhousesinstead.This move is expected to make the mutual funds business viable, without having to suffer the side-effects of bringing back entry loads. Entry loads typically create an incentive for the distributorstoencourageearly churning of the folios held by the clients. Since loads are charged every time a customer buys units of a fresh mutual fund, distributors and agents have an incentive to promote early exits by clients from existing funds. Sebi is, therefore, not in favour of bringing entry loads back, a senior govern- AS ENTRY LOADS ON MFs ENCOURAGE EARLY CHURNING OF FOLIOS BY DISTRIBUTORS, SEBI NOT IN FAVOUR OF THEIR RESTORATION ment official who interacts with the regulator said. After Prime Minister ManmohanSinghtookchargeofthefinanceportfolio,he talked about issues concerning the financial sector, including the mutual fund industry and the insurance sector, and said that these issuesneedtoberesolved. Mutual funds are allowed to charge various maintenance expenses annually, andtheoverallexpenseratio is capped at 2.25% of assets under management (AUM). Increasing the expense ratio to 2.5% of AUM per annum would result in mutual funds’ annual income increasingbyasmuchas11%. On an AUM base of R2.5 lakhcrore,a2.5%expenseratio would yield an income of R6,225 crore a year, up from R5,625 crore a year at 2.25% currently.Thisextraincome of R625 crore per annum would provide a fillip to the mutual fund industry, enabling them to pay more to distributors. Mutual funds had aggregate AUM of R7 lakh crore as on May 31 in all schemes, according to Association of Mutual Funds in India(AMFI)data. A higher expense ratio would mean that Sebi may not be required to reintroduce entry loads, which were banned in 2009 to protect investors’ interests. ■ Continued on Page 2 Highway builders eye stake sale, tie-ups to comply with bid norms Timsy Jaipuria & Subhash Narayan New Delhi, July 1 I N a bid to have a healthy balance sheet to comply with the bidding norm, highway developers are looking at selling stakes in variouscentralroadprojects to raise funds as banks deny them loans citing high risks involved in build-operatetransfer (BOT) projects. The inability to tie up funds for projects is also forcing small and medium companies to explore options other than stake sales, such as partnerships with other firms. “ Alotof buildersaredoing so and it is a healthy practice P 6 I N V E S T O R considering it helps builders to reassure their guarantees with the lenders,” said Feedback Ventures chairman VinayakChatterjee. Among others, infrastructure financing company Srei Infrastructure has lent its support to several roaddeveloperstoqualifyfor large projects. MBL Infrastructure is one company thathasbaggedtworoadprojects in partnership with Srei. “Equity dilution helps companies place bids for multi-million-dollar projects,”saidHemantKanoria, chairman and managing director, Srei Infrastructure Finance, without disclosing details of the talks the company is having with several developers seeking equity support and partnerships. Industry experts say that though partnerships may limit revenue flows of companies in the near term, they help them qualify for larger projects than they could have done in their individual capacity. In addition, it also limits debt commitment of the developer, which will help it maintain a healthier balance sheet. ■ Continued on Page 2 ■ Rel Infra’s R800-cr Haryana road project begins, Page 12 invoked in the case of the non-resident investors of the FII.” This means that even though participatory note (PN) holders won't be directly taxed, the FIIs will have to pass on only the post-tax gains to their clients. So there is no real relaxation whatsoever. The sources said Singh might consider some softening of this blow because he wouldn'twantthetaxhaven(Mauritius, Cyprus) route for investments in India to be made less attractive at a time the country is grappling with a high current account deficit and the threat of capital flight. Singh’s statement after taking over the finance portfolio that the economy’s“animalspirits”oughtto be revived without looking for “international solutions” to the country’sproblemsshowedhisresolveto temporarily opt for Keynesian deficit spending, analysts feel. With the government’s decision to loosen its purse strings and step up investment, public-private partnership projects in infrastructure, which are being encouraged by fasttracking approvals, might get a legup. In parallel, consumption expenditure might be kept tight, meaning welfare schemes like the Mahatma Gandhi National Rural EmploymentGuaranteeSchemeisunlikely to see outlay hikes. e F E INDIA A PERFECT MARKET FOR HP’S LATEST PRODUCTS, SAYS INDIA MD NEELAM DHAWAN L U C K N O W M U M B A I P U N E Ceiling on Ulip commissions hits cos, agents LIFE INSURANCE NO LONGER A PREMIUM PRODUCT 2011-12 2010-11 2009-10 2008-09 2007-08 Capital deployed 33,414* 31,437 28,943 24,988 16,692 (including share premium if any) (R cr) No. of branches 11,172* 11,461 11,927 11,720 8,737 No. of agents (in lakhs)^ 23.78* 26.08 29.17 29.06 24.98 No. of direct employees 247,550* 242,682 267,940 285,244 254,332 No. of new policies issued (in crore) 4.41 4.81 5.32 5.09 5.08 New business premium (R cr) 114,233 125,828 109,894 87,331 93,713 * Till December ^ Does not include corporate agents Source: Irda, Life Insurance Council Saikat Neogi New Delhi, July 1 W ITH the insurance regulator clamping down on commissions for unit-linked insurance products (Ulips), the number of life insurance policies sold last year dropped to 4.41 crore from a record 5.32 crore in 2009-10. With the industry in the doldrums, both the state-owned Life Insurance Corporation of India (LIC) and the 23 privatelifeinsurershadlittleoption but to drastically cut backontheiragentnetworks; at last count, some 5.4 lakh agents have been out of business since 2009-10. Life insurers have also needed to prune their own sales and distribution teams and as a consequence the number of direct employees at these firms is lower by about 20,000. The effort to rein in costs has seen more than 800 branches, mostly in tier-IIandtier-IIIcities,being shut down. In 2011-12, premiumscollectedbytheindustry fell 9.2% to R1,14,233 crore. ■ Continued on Page 2
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