Cheaters' County

Saradha collapse is just tip of an iceberg with many more closures waiting on the cue. It is high time that RBI and SEBI are given more teeth to inspect into the books of burgeoning chit funds companies.

With the kind of financial frauds mushrooming in every nook and corner of India, it can no longer boast of having a tightly regulated financial sector. The debacle of Kolkata based Saradha Group’s chit fund business is the recent instance of how several wheeler-dealers are indulged in investment fraud undeterred and unchecked taking innocent people on ride. While capital adequacy norms, risk controls or even basic financial disclosures are thrust upon top level enterprises but the same are hardly imposed on small entities, thus a sheer anarchy prevails at bottom level. This is a matter of concern for the nation where a good chunk of population is by and large humbly resourced and financially-illiterate prone to get easily duped.

Chit fund, ponzi schemes, multilevel marketing frauds are not new to India. Saradha scam is yet another example of what Kuber, JVG, Speak Asia etc have done with the hard-earned thrifts of innocent people. They simply raise vast amount of money from innocent people luring them of high returns, special packages or foreign tours but eventually round-trip the collected money from one depositor to another instead of creating more assets. Such fraudulent business is burgeoning at faster pace with even 10-20 people opening up unregistered committees and start collecting money projecting fake investment plans as authentic.

It is ironical that despite having independent financial market regulators like RBI, SEBI, and IRDA etc for varied financial services, fraud companies devising Ponzi schemes are kept on flourishing. The problem is that regulation of chit fund business is governed by a central Chit Funds Act 1982 as well as specific Chit Fund Acts enacted by different states. As it is a State subject, RBI and SEBI exclude chit funds from the purview of their regulations for deposit-taking finance companies or collective investment schemes and only target capital market and banking frauds. It is time that financial regulators focus on financial frauds taking place at grassroots level as nearly 60% of India is still un-banked and vulnerable to be targeted by chit funds companies operating under no control or checks. Not only chit funds but almost entire grassroots financial business arbitrarily operates in seemingly no man’s land. For instance, co-operative banks and money lenders at lower level are also no less fraudulent.

It is of utmost importance that some measures are devised to keep a check over such Ponzis as in the absence of proper monitoring system; some crooked minded fellows easily acquire political clout and leverage the opportunity to give a legitimate shape to their fraud investment plans. They even enter into media and education and facilitate money-laundering, black money economy undauntedly by the virtue of political connections.

India’s financial sector is deeply crippled with corruption and hoax activities and more so at bottom level of pyramid. Saradha collapse is just tip of an iceberg with many more closures waiting on the cue. Policymakers must not forget that financial institutions are prone to ‘contagion’ and the pace at which such fraud companies are coming into vogue; it is highly significant to strictly regulate them at earliest. It is high time that RBI and SEBI are given more teeth to inspect into the books of burgeoning chit funds companies.

Export Growth: Let's Hope!!

Reformed SEZ policy might not bring desired results in medium term due to infrastructure hurdles and bureaucratic bottlenecks for business set-up. 

Considering the declining rate of exports and subsequent rising trade deficit, the Annual Supplement to the Foreign Trade Policy primarily aims at putting exports on a growth trajectory. Not left with many options to do that, Commerce Ministry has specifically tried to rejuvenate investment in Special Economic Zone (SEZ) through amending existing policies. In addition, extension of interest subsidy to engineering exports, simplifying the transaction rules for exports and expansion of Export Promotion Capital Goods (EPCG) scheme are few other provisions of Foreign Trade Policy (FTP) for current fiscal year 2013-14. However, it doesn’t speak about what measures are to be taken to control nation’s increased dependence on imports.

As per new SEZ framework, minimum land area requirement for multi-product SEZs will be 500 hectares as against 1000 hectares and for sector-specific SEZs 50 hectares as against 100 hectares. In a bid to boost small and medium size enterprises, Govt. has done away with mandatory requirement of minimum 10 acre of land area for setting up a business. Now, small office buildings can also avail SEZ benefits as minimum land requirement for 7 major cities is 100,000 sq. m, 50,000 square meters for Category B cities and only 25,000 square meters for the remaining cities. Also, exit policy has been introduced for existing units based in SEZ who can now transfer or sale ownership of their SEZ area. To some extent these moves will help revive investor interest but SEZ developers and units are disappointed that the Government has not exempted them from Minimum Alternate Tax (MAT) and Dividend Distribution Tax (DDT) which primarily drove away investments from SEZ. They also contend that SEZ units must have been made eligible for focus product and focus market schemes.

FTP has done away with 3% duty Export Promotion Capital Goods scheme and harmonized it with zero duty EPCG scheme. Sectors under Technology Upgradation Fund Scheme (TUFS) can also avail benefits of zero duty EPCG scheme which entails zero import duty on capital goods meant for production. This scheme has been extended beyond March 2013. The only glitch is that authorization holders will have export obligation of 6 times the duty saved amount to be completed in a period of 6 years. The interest subvention scheme, by which interest on loans to exporters is reduced by 2% has been extended by March 2014 and also has been widened to include 134 sub-sectors of engineering and textile sectors. These steps will help improve export performance of textile manufactures and garment exporters.

According to recent data, export from India has declined by 1.76% to $300.6 billion while imports rose 0.4 per cent to $491.5 billion pushing up the trade deficit to $190.91 billion. Commerce Minister Anand Sharma has tried to deliver best possible provisions via Annual Supplement of FTP to facilitate exports in the backdrop of global economic slowdown and policy restraints at home but one must not expect a quick export jump in the wake of this policy as export promotion is a long term initiative. Even the reformed SEZ policy might not bring desired results in medium term due to infrastructure hurdles and bureaucratic bottlenecks for business set-up.

Treading on Treacherous Trade

Indian Govt. is mysteriously going ahead with negotiations on India-EU FTA without addressing contentious issues at home. It has to listen to and also resolve the doubts of stakeholders affected by it.

Non-transparency and insolence has perhaps become the nature of the current Govt. Seemingly, not concerned with already ballooning trade deficit, India is likely to sign a Free Trade Agreement with world’s biggest trade block European Union and that too without any discussion with public in general and stakeholders in particular. Assumptions based on leaked documents online are suggestive that the agreement is detrimental to indigenous agriculture, commodity and industrial segments like poultry, dairy, farm, fisheries, automobiles etc. and will further dampen India’s self-reliance. 

Proposed FTA with EU is the culmination of long-drawn negotiations on Bilateral Trade and Investment Treaty which commenced in 2007. The modus operandi of going ahead with this FTA is dubious as despite such a long time Govt. has not even clarified what benefit it would bring to India and how it will help maintain trade balance with EU when latter already has low tariffs in most products while India’s average applied tariffs, even after significant reductions, are 31.4% and 9.8% for agricultural and non agricultural products respectively. In addition, close to 69 percent of India’s agricultural exports and 65 percent of its non-agricultural export already enter the European markets without duties, whereas EU allows only less than six percent of the former's products without duty. Hence, the benefits of the pact are ostensibly tilted towards this influential economic block who is trying to seek even lower tariffs and easier flow of products in growing Indian market.

Another apprehension is that it will hit Indian agro-industries and also marginal and small farmers as agriculture in India is not as incentivized as it is there in Europe where low production cost in itself is a protective barrier for domestic companies while India is at a loss at this front. EU is not willing to address this issue by contending that implicit subsidies are a multilateral issue discussion on which can only be routed through WTO.

EU, especially Germany is emphasizing the inclusion of automobiles in FTA which is a major concern for automobile sector in India. Also, EU demands stricter Intellectual Property regime intimidating generic drug manufactures in India. Pact is also believed to grant it procurement in central and state level institutions which would be extremely unfavorable for Indian Small and Medium Enterprises (SMEs) who can in no way compete with advanced European companies. Foreign companies might be allowed in technology-driven sectors but doing this for regular contracts is certainly harmful for the growth of homeland companies. This step would be an exclusive prerogative for EU as it hasn’t been accorded to any other FTA partners till now.

The shroud secrecy with which Govt. is moving ahead with India-EU FTA pact is against the sound democratic principles. Globally no Govt. can ratify bilateral trade agreements on its own discretion but Indian Govt. is fearlessly and quite mysteriously going ahead with negotiations with EU without addressing contentious issues at home. It is commendable that Parliamentary panel has warned Govt. not to sign the pact before it being discussed with stakeholders. Govt. must disclose what commitments are being made via FTA. It has to listen to and also resolve the apprehensions of interest groups affected by it. 

Humanizing Pharmacy

Supreme Court verdict on Novartis has established the sanctity of Indian Patent Laws and also sent a message across Big Pharma that its laws cannot be exploited. 

As the court struck down ‘evergreening’ of drugs and compulsory licensing already there with the authorities, India has enough power to stop arbitrary pricing of medicines in India by global Pharma giants. Supreme Court verdict on Novartis is the befitting answer to the devious practice of Big Pharmaceuticals who try to constantly extend the life of a drug-patent on frivolous grounds. The decision will benefit the Indian pharmaceuticals companies and also those poor people who by and large depend on the generic form of original drug. This stellar judgment has set a precedent for ongoing and upcoming patent cases which will go a long way to protect the availability of cheap generic drugs for poor patients. It will also drive other developing countries to follow the suit set in by Indian Patent Act.

In 2005 India conformed to the World Trade Organization’s intellectual property standards (1995 TRIPS Agreement), and retroactively accepted applications for product patents from 1995 for scrutiny. It is then that Novartis sought patent for its breakthrough blood cancer drug Glivec but Indian Patent Office, as per the amended Indian Patents Act, section 3(d) rejected its patent plea stating that inventions that are mere "discovery" of a "new form" of a "known substance" and do not result in increased efficacy of that substance are not patentable. Glivec which is a highly effective treatment for leukemia is nothing more than an altered version of beta-crystalline form of the imatinib mesylate compound, thus doesn’t require a patent. Novartis further claimed against this judgment in Madras High Court and also in Intellectual Appellate Board but both the institution dismissed its petition on the same ground, which has now finally been rejected by Indian apex court as well.

Novartis including other multi-national pharmaceuticals are criticizing the ruling stating that Indian patent laws aren’t robust enough to protect intellectual property rights. But the criticism is unfair as drug-companies are known to tweak with the existing molecules to show novelty and thus try to get an extension of drug-patent, a practice popularly known as ‘evergreening’. India rather deserves praise that its patent act is strong enough to keep a check over this unjustified tendency of Big Pharma. They have also threatened India to not invest in Research & Development in the country but the fact that Indian pharmaceuticals market is world’s fourth largest by volume and fourteenth largest by value, hardly any drug industry can afford to treat India as pariah in pharma sector.

Drug patents which are meant for fresh and authentic innovation have only enticed big pharma companies to make super-profits at the expense of social good and well-being. If Novartis were to get its patent on Glivec, it would have forced Indian Pharmaceuticals companies to stop producing generic drugs, thus making the drug non-accessible to a good chunk of poor population in developing world as one tablet of Gleevec, patented in US costs around 1.2 lakh while its generic form, Glivec manufactured by an Indian pharma company Resonance is available at 30/- per tablet.

Supreme Court verdict on Novartis has established the sanctity of Indian Patent Laws and also sent a message across Big Pharma that its laws cannot be exploited. It has marked the beginning of a new era of patent system to regulate the pharma sector.

Super regulator : Greater contention

Just because Govt. doesn’t enjoy autonomy in financial matters, it intends to dominate the sector through Financial Code Bill 2013

India is toying with  an idea of super regulator for burgeoning financial sector amid spate of incongruous standpoints of financial regulations. The new Financial Code Bill proposes to create a unified financial regulator merging rest of other regulators  barring RBI, though  very purpose of bringing it to the fore remains unclear. The report of Financial Sector Legislative Reforms Commission headed by Justice B N Srikrishna, has already generated a hectic debate as it waters down RBI’s powers and wets financial regulation in one super notch bureaucracy.  There are valid apprehensions that sole regulator may suffocate financial sector with confusions and turf wars amidst complex nature of financial products and services. Having multiple regulators for varied financial services is a global practice, willing to do away with it is like returning to square one.

Under the proposed regulatory architecture, there will only be two regulators i.e. RBI and a Unified Financial Agency which will merge the existing capital markets, insurance, pension fund and forward markets regulators (Securities and Exchange Board of India, or Sebi; Insurance Regulatory and Development Authority, or Irda; Pension Fund Regulatory and Development Authority, or PFRDA; and the Forward Markets Commission). There has to be different regulatory bodies for capital markets, commodity markets, insurance and banks. Govt. must make it very clear what purpose a super regulator would serve when having at least three apex monitoring authorities in financial sector is a common practice. While IRDA and PFRDA can be merged into one but merging all four is not only irrelevant but unwise.

A closer study of the Financial Bill suggests that it implicitly focuses on pruning RBI’s powers perhaps because RBI hardly designs its policies the way Govt. wishes it to. According to new Financial Code there will be an empowered Monetary Policy Committee which will be though headed by Chief of central bank but five of its seven members will be outsiders. The finance ministry will also send a representative, but without a vote. That means the majority of members will come from outside the RBI and they will be appointed by the government. MPC is a welcome move but the current structure seemingly aims at diluting RBI Governor’s control over monetary policy who can override MPC only in exceptional circumstances.

Non Banking Financial Institutions and Housing Finance Companies have also been kept outside RBI’s ambit which is certainly insignificant as the functions of NBFCs and HFCs are no different from banking institutions, therefore, having different regulator for former and latter is utterly illogical.  RBI will also no longer be Govt’s debt manager and a new body i.e. Public Debt Management Agency will take over this job of raising loans for the government. Even on capital controls, FSLRC has proposed that all issues related to inflows be handled by the government, while RBI should deal with outflows. It also recommends empowering the existing Financial Stability and Development Council, which would be headed by Finance Ministry and not RBI.

The only positive proposal seems to be coming out of this bill is that it specifically addresses issues related to consumer protection. There will be a common Financial Redressal Agency which will handle all type of consumer complaints from bank deposits to exotic derivative products. It will thus spare consumers to go through the varied complex system of grievance registration and redressal for diverse financial services.

FSLRC recommendations have come in the wake of a spate of disagreements between the central bank and the finance ministry over the past decade. Just because Govt. doesn’t enjoy autonomy in financial matters, it intends to dominate the sector through this legislation. Financial policies must be governed by an institution independent of Govt. control as it is now. To encroach upon RBI’s authority will only increase further governance problem. Govt. would do well to first contemplate likely repercussions what such a contentious step can bring before moving towards its implementation.

Food Gambit

Reeling under huge fiscal deficit, it is unclear how the Govt. would fund such an expensive scheme also how it would acquire enough foodgrains to mete out to such a whopping population.

Despite series of  scams and comprehensive malfunctioning in right to education and right to work, Govt. seems undeterred and hell bent for implementing National Food Security Bill before the advent of general elections. The bill has been passed by cabinet and is likely to be kept before Parliament during the second half of the budget session.  This Bill aims at giving food security to 75% of rural and 50% of urban population. Reeling under huge fiscal deficit, it is unclear how the Govt. would fund such an expensive scheme also how it would acquire enough foodgrains to mete out to such a whopping population.

The Bill will provide guaranteed 5 kilograms of rice, wheat or coarse cereals to all the identified beneficiaries at a flat rate of Rs 3 per kg for rice, Rs 2 for wheat and Rs 1 for coarse cereals. There would not be any Above or Below Poverty Line demarcation but entitlements for beneficiaries under the Antodaya Anna Yojana (AAY) under which 35 kilograms of grains is provided per family will be retained in the Bill. Overall 67% of India’s 1.2 billion people are being covered in this scheme.

Why India is heavily undernourished despite a long history of food subsidies is because the quality and type of food being delivered don’t appeal to the poor in the first place. It is pathetic that no innovation is palpable in the mindset of Govt. to improvise the same. What is being delivered on the name of cheap food is low quality wheat, rice, millet etc. These grains aren’t enough for nourishment and quality of food like pulses, ghee, salt, green vegetables etc are too expensive to afford for destitute.

NFSB is based on creaky Public Distribution System that has been blamed time and again for failing to deliver the goods because of massive pilferage. The PDS is carried out nationwide with the help of over 5,00,000 ration shops. It will also prescribe guidelines to states for the identification of beneficiaries.  Infact,  a study done by the Planning Commission in 2005 showed that 58% of the subsidized food grains issued from the central pool do not reach the Below Poverty Line (BPL) families because of identification errors, non-transparent operation and unethical practices in the implementation of PDS. Given this NFSB will be disastrous more than any other scheme as exorbitant fund and food grains are at stake.

The government needs around 61 million tonnes of grains a year to implement the Act, which is nearly one-fourth of the country’s total food grain output. A couple of national-level farmers’ organizations have opposed the National Food Security Bill, saying it would “lead to nationalization of agriculture by making the government the biggest buyer, hoarder and seller of food grains”.

Agriculture market must be unregulated and farmers must be sufficiently incentivized to raise their food production. Globally this is a general practice but UPA’s flagship NFSB focuses on just opposite of that. As the subsidy burden is going to be quite high, Govt. will keep the minimum support price lower discouraging the small and marginal farmers to grow food grain. Thus, NFSB is likely to disastrously distort the already dilapidating food market in India.

The lack of vision visible in NFSB establishes the fact that it addresses nothing more than political motives of Congress. Going against the recommendations of Kelkar Committee to contain the food subsidy, Govt. intends to launch an even more expensive subsidy doll-out program which will raise the food subsidy burden to 1.1 lakh crore from the current 90,000 crore.  Failure to target right beneficiaries and faulty delivery mechanism can never make NFSB workable. A revolutionary, an innovative approach to architect the food subsidy program is the need of time otherwise Right to food security in its current form would mean nothing to who it aims at. 

Murky Banking

 Paying heed to what Operation Red Spider reveals is of paramount importance otherwise growing nexus between fraud banks and black money hoarders can be gross.

Money laundering through banks !!  The  bizarre  and ignominious face of banking has finally  surfaced in India as well. A recent expose has validated the fact that Indian pvt. banks are not insulated from the vices of global private banking. Stories of LIBOR fixing scandal in Britain, bank finance to terror  in Iran and HSBC drug cartel now has an Indian edition as top notch Indian banks ICICI, HDFC and Axis bank involved in money-laundering. Govt is planning to bring in new players in banking industry, while finance Ministry and banking regulator Reserve Bank of India seems to be in complete dark about the maladies of Indian banking. This Cobrapost (web magazine) sting expose also dares the effectiveness of  Know Your Customers norms. It seems that KYC norms make genuine   customers to run from pillars to post but the same gets violated for the good of those deterring whom is the prima facie motto of KYC. 

A latest research from National Institute of Public Finance and Policy (NIPFP), a Govt. think tank, estimates that India’s current black money economy can be 30% of its Gross Domestic Product (GDP) nearly Rs 28 lakh crore. It is no rocket science to guess how this much of unaccountable cash sloshes about in the economy without getting caught. Definitely RBI and Finance Ministry are intimated with the fact that it is banks that facilitate such fraudulent activities but former has taken it for granted that latter will keep faltering and black money will keep laundering. There used to be “The Banking Cash Transaction Tax (BCTT) which would levy a tax of 0.1 percent on individuals who withdrew or deposited more than Rs 50,000 in a single day in cash. Even encashment of fixed deposits paid in cash were subject to this tax but Finance Minister P. Chidambaram withdrew BCTT for no obvious reason befor 2009 general election. Thus, instead of creating a tougher regulatory regime he seemingly preferred to make the system more feasible for misuse.

The most startling fact coming out of CobraPost revelation is that the whole process of turning black money into white is done via Standard financial practices like opening bank accounts, putting money in insurance products, allotting bank lockers and also via inventing exclusive investment plans for moneyed customers. It seems that banking officials are working as wealth managers for their revered rich clienteles and, for the purpose, don’t even hesitate to tamper with the accounts of innocent account holders. The ease and comfort with which the banking officials of those three banks seemed to be dealing with the customer in the sting videos makes it obvious that those higher up in the hierarchy would have been surely in the knowhow of such acts and if they weren’t, its even pathetic because if the higher authorities in the same institution are oblivious of what lower rung officials do, one must not expect much from RBI and Finance ministry.

Banking is a complex system and with the inception of electronic banking it has become even more complex regulating which is a hard challenge now. Vigilance hasn’t grown the way banking system has developed. Prevalent regulatory and monitory measures such as, Foreign Exchange Management Act or Prevention of Money-laundering Act, are victim of inadequate and incapable implementation. It is high time that Reserve Bank of India graduates itself as far as bank monitoring is concerned. It cannot do away with its responsibility just by imposing KYC norms on banks. It must fabricate a robust mechanism to keep a constant vigil on banking institutions making latter answerable to former.

Tons and tons of literature are there to validate that banking fraud has become a global phenomenon. Considering this, Governments worldwide are gearing themselves to implement stringent regulations and punitive measures to curb banking frauds. For instance, huge penalty has been put on banks indulged in LIBOR fixing scandal, HSBC was also adequately fined for laundering money to Mexican drug dealers and the issue of Iranian banks financing terrorism was also dealt with impeccably.

The callous attitude with which RBI and Finance Ministry is dealing with this bank scandal is pathetic. Paying heed to what Operation Red Spider reveals is of paramount importance otherwise growing nexus between fraud banks and black money hoarders can be gross. Banks are the most crucial economic institutions. An arbitrarily banking is disastrous. It’s high time that Govt. clears this banking mess by taking swift and strict actions against ICICI, HDFC and Axis bank. Firing lower-rung officials isn’t enough; senior management must be made accountable to this wrongdoing. Apart from this, a robust mechanism having modern regulatory laws must be incepted as soon as possible so that the future possibility of any such happening can be deterred in the bud.