Legal & Regulatory

India Struggles Forward with Prevention of Corruption

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Dec. 2 – In a positive sign for doing business in India, a new anti-corruption bill is currently awaiting approval by the Indian parliament.  The Prevention of Bribery of Foreign Public Officials and Officials of Public International Organizations Bill (Bill) seeks to amend the loopholes that existed within the original Prevention of Corruption Act (Act) that was passed in 1988.

The Bill was originally introduced to the Lok Sabha in 2011 and was then referred to a parliamentary standing committee. It has only now reemerged for approval by the Indian parliament.

The new Bill will also finally bring India into accordance with the United Nations Convention Against Corruption (UNCAC), which was ratified by the country on May 9, 2011.

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India’s Gold Dilemma

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By Kavita Patel

Nov. 25 – India’s voracious appetite for gold may be an obstacle to its economic growth. The subcontinent is the world’s leading consumer of gold but has almost no domestic supply. As rising income boosts demand, gold imports jumped from about 471 tons in 2001 to around 1,017 tons in 2012. Demand is inelastic as this precious metal plays an integral role in Indian culture; almost half of all purchases are used during weddings. Unfortunately, gold is an unproductive store of wealth. It deepens the current account deficit and slows capital investment, weakening the economy.

Inflows of the yellow metal have weighed on the country. In the past, almost 40 percent of India’s gold imports were processed by its skilled and inexpensive labor for subsequent export. This number has decreased to just 29 percent, and gold imports helped push the current account deficit to the US$87.8 billion it reached last financial year, an unmanageable 4.8 percent of GDP.

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2013 Changes in Indian FDI Policy

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By Shawn Greene

Nov. 21 – Navigating foreign investment in India can be daunting. The World Bank’s Doing Business 2014 report ranks India among the most difficult countries in which to start a business – 179th out of 189 countries analyzed. As such, foreign firms are highly recommended to hire a professional services firm to assist with setup and investment in the country.

For foreign institutional investors (FII) and firms considering foreign direct investment (FDI), a familiarity with India’s recent changes in FDI policy is critical. Below, important amendments made to India’s foreign investment policy in 2013 are summarized, and changes currently under discussion for 2014 explored.

Amendments made this year in Indian FDI policy impact a number of key business sectors, and in many instances eliminate the need for foreign investors to obtain approval from the Indian Government before investing. Additionally, policy changes in 2013 alter the legal definition of ‘control’ and regulations for single and multi-brand retail trading.

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RBI Issues New Circular on Foreign Investment in Credit-Enhanced Debt

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Nov. 15 – The Reserve Bank of India has issued a new circular designed to increase capital inflows by allowing foreign investors to purchase credit-enhanced bonds issued in India. The new decree, Circular No. 74, will allow foreign institutional investors (FII) and qualified foreign investors (QFI) to purchase a total of US$5 billion in domestically issued credit-enhanced bonds.

A credit-enhanced bond is a debt instrument issued with a third-party guarantee, often in the form of collateral or cash promises. These enhancements improve the bond’s credit rating and lower the issuing company’s interest obligations, resulting in a lower cost of debt.

As per Circular No. 94, issued in April of this year, the maximum investment quota for FIIs will remain fixed at US$51 billion for corporate debt and US$25 billion for government-issued debt.

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India Pushes RBI to Loosen Infrastructure Financing Rules

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Nov. 11 – Arvind Mayaram, economic affairs secretary at the Indian Finance Ministry, has called upon Raghuram Rajan, governor of the Reserve Bank of India (RBI), to transform the rules relating to infrastructure financing as well as the treatment of non-performing loans in that sector. The Finance Ministry views these potential moves as key to reviving growth and investment in India.

In particular, the Ministry would like to see the new rules take effect in cases where infrastructure projects were delayed but not at the fault of the developers. These types of projects should be allowed to refinance without being treated as restructured loans as that would require higher provisioning.

“During the last three years, on account of [the] economic downturn, we are seeing an increase in such projects. There is, therefore, a need for the RBI to permit refinancing without it being treated as [a] restructuring of the loan,” said Mayaram.

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Reserve Bank of India Signs MoU with Australia and New Zealand

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Nov. 8 – The Reserve Bank of India (RBI) has signed a memorandum of understanding (MoU) with the Australian Prudential Regulatory Authority and the Reserve Bank of New Zealand this week during Deputy Governor K.C. Chakrabarty’s visit to the two countries.

The new MoU establishes “supervisory cooperation and supervisory exchange of information” between Australia and New Zealand’s monetary authorities and the RBI, according to a press release issued by the Indian government today.

As signatories to the MoU, India, Australia and New Zealand will increase monetary cooperation through frequent meetings of high-level officials and on-site visits between government representatives. The deal will encourage greater sharing of monetary strategies between the countries to create stronger economic ties and market stability.

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India to Allow Foreign Banks Access to Local Markets

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Nov. 7 – After markets closed on Wednesday, the Reserve Bank of India, the country’s Central Bank, announced a series of new regulations that will allow foreign banks much greater access to the country’s domestic market. The domestic market had previously been highly protected against added competition from foreign banks.

In essence, under the new regulations, foreign banks will be treated the same as domestic banks.

In order to be eligible under the new regulations, foreign banks much switch from how they currently operate in India by upgrading from a branch to a wholly owned subsidiary structure. Upon forming the subsidiary, foreign banks are required to invest at least US$80 million (5 billion rupees).

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India Rekindles Coal Sector, Allows Public-Private Partnerships

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Oct. 28 – Following years of production deficits, the Indian government will now seek public-private partnerships (PPP) in the coal sector to boost domestic production, according to a draft agreement submitted this month by the Planning Commission.

The coal sector, which is largely dominated by the state-owned mining company Coal India, has experienced perennial production deficits and meets only three-quarters of the 773 million ton annual domestic demand.

By allowing PPPs, the Planning Commission hopes to rekindle the Indian energy sector through increased competition among coal producers.

“The only option before us is to increase domestic production and since Coal India is struggling to meet domestic requirement, it is best to involve private players, who will produce faster and cheaper coal,” said a senior official with the Planning Commission.

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