FINANCIAL NEWS

A committee appointed by the Reserve Bank of India (RBI), headed by the chief executive of Indian Banks’ Association (IBA) and consisting of representatives from all stakeholders, except bank customers, has recommended an increase in interchange charges for all transactions carried out on automated teller machines (ATMs) across the country. The committee also wants to cap cash withdrawal limit at Rs.5,000 per transaction and levy charges for any larger amount.

The Union government on 24th June announced approval for a decision to bring 1,540 cooperative banks holding close to Rs.5 lakh crore worth of deposits from 8 crore lakh account holders, under the purview of Reserve Bank of India (RBI). These banks will be supervised by the RBI in the same fashion as the scheduled banks, offering protection to depositors.

Stock market regulator, Securities and Exchange Board of India (SEBI) has amended the takeover norms to allow promoters to increase their stake by up to 10% through a preferential allotment. The amendment in the regulations allows a promoter owning 25% or more voting rights in a company to increase shareholding by up to 10% in a year versus the earlier limit of 5%. This is valid only for the current financial year and is allowed for a preferential issue of equity shares.

In a bid to help stressed companies raise capital through a preferential allotment, Sebi on Tuesday relaxed the pricing methodology for such issues and exempted allottees from open offer obligations. To avail such relaxations, the stressed companies would require to comply with certain conditions laid out by the market regulator. 1. Sebi says that any listed company that has made disclosure of defaults on payment of interest or repayment of principal amount on loans from banks or financial institutions or unlisted debt securities will be considered as stressed. The disclosed default should be continuing for a period of at least 90 calendar days after the occurrence of such default. 2. Companies seeing downgrading of the credit rating of the financial instruments (listed or unlisted), credit instruments/borrowings (listed or unlisted) of the listed company to “D”. 3. The other eligibility criteria are the existence of an inter-creditor agreement in terms of RBI (Prudential Framework for Resolution of Stressed Assets) Directions 2019 dated June 07, 2019. The capital raising through this route has to satisfy the following requirements as well: 1. The preferential issue will be made to persons and entities that are not part of the promoter or promoter group. 2. The resolution for the preferential issue at the aforesaid pricing and exemption from the open offer will be passed by the majority of minority shareholders. 3. In addition, the proposed end-use of proceeds of such preferential issue will be required to disclose. For this, a monitoring agency will be appointed for monitoring end-use of the proceeds. The shares issued to the investors in such an issue shall be locked in for a period of three years

KNOWLEDGE

You have taken a big insurance cover, now?

Post the new rules affected by the Insurance Laws (Amendment) Act, 2015 which introduced the concept of a beneficial nominee, the nominee is the ultimate beneficiary of the insurance corpus. The beneficial nominee is entitled to receive the maturity benefits and other legal heirs can’t claim the maturity proceeds. To avoid confusion and dispute, it is necessary to decide how much each nominee should get from the proceeds. Multiple people can be nominated as beneficial nominee for one policy. The death benefit can be shared among the nominees as per the percentage chosen by the policyholder. If the nominee is less than 18 years, the policyholder should provide an appointee. The sum assured will then be paid to the appointee as declared by the policyholder.

The policyholder can legally transfer the rights of an insurance policy to another person through a process of transfer called as “Assignment”. There are two types of assignment, absolute and conditional assignment. Once assigned under absolute assignment, the policy cannot be owned again by the policyholder. The assignee can gift the policy to someone else against the wishes of the policyholder. Under the conditional assignment, upon fulfilment of the conditions then the life insurance policy is assigned back to the policyholder from the assignee. This works in the case when the holder wants to take a bank loan. Once the loan is paid back, the assignee will reassign to the holder.

There is a paradoxical problem with claims. Receiving a lump sum has its own problems and receiving it over a series of years in the form of annuities has its own problems. The former has a risk of losing the capital if not carefully allocated and the latter has a risk of losing the opportunity to put the capital to better use. It is always better to plan ahead and create a sequence for the different requirements expected over time and also invest the disbursement.

Accrual vs Duration

An accrual fund means a fund which follows an accrual strategy. Under this strategy, the fund holds bonds earning interest and upon maturity, the principal is reinvested in fresh bonds. Liquid funds, ultra-short-term funds, short-term debt funds, and credit opportunity funds primarily follow an accrual strategy. A fund following a duration strategy seeks to gain from bond price rallies when interest rates fall. When interest rates fall, bond prices rise – since new bonds will carry lower interest, existing bonds become more attractive and thus prices rise until yields match the new bonds. A duration fund will try to make capital appreciation from the bonds it holds.

How to spot an accrual fund from a duration fund? An accrual fund will have minimal or zero government securities, low maturity, high turnover or else high maturity, low turnover amid typically higher yield to maturity.

Does accrual fund carry risk and if so then how is it different from duration fund? Risk in accrual funds increases when the funds hold debt instruments with an effort to increase the yield component of the fund. This hunt leads to lower credit rating bonds. , called credit risk. Funds take this risk for the higher coupon such papers offer. This risk gets magnified when there is a series of defaults in the corporate bond market and the high yield bonds become unwanted due to the requirement of risk reduction in general across accrual funds. The duration funds, on the other hand, carry interest rate risk which is the fallout of unexpected interest rate movements. Accrual funds without credit risk imply a lower risk and also means lower returns as well when interest rate falls.

NPS Tier I and Tier II Accounts

The Tier I account is the default account into which the initial contribution goes into. The Tier II is, however, an optional account and one that can be additionally opened to park savings in it as it has no lock-in period. Tier I account is a locked-in account till age 60.

Tier I accounts investments are eligible for tax deductions for both government and non-government employees. The Tier II account is not available for non-government employees for tax deduction purposes. Only government employees can claim the benefit of tax exemption up to Rs.1.5 lakhs under section 80C for investments in Tier 2 account provided there is a lock-in for 3 years. A maximum of 2 lakhs is available for claiming tax deduction under Tier I and II account when along with Rs.1.5 lakh in section 80C, 50k is invested under Section 80CCD(1B). The contribution made by the employer up to 10% of salary (Basic plus Dearness Allowance) can also be claimed as a deduction from the taxable income under Section 80CCD(2) of the Income Tax Act,1961 in Tier I account.

While Tier I offers tax benefits at the investment time, at withdrawal it creates a quasi tax in the form of a compulsory annuity to be taken on at least 40% of the corpus. This implies that the person who invested in the NPS cannot use the 40% corpus for any purpose and has to do with the annual annuity returns depending on the annuity product. Tier II offers no tax benefits at any point for private employees and can be withdrawn at any time. At the time of exit, the entire exit amount is taxed as per the tax rates apply depending on the tax slab.

    One should be careful of the fact that as things stand today, 40% of the accumulated corpus in Tier I account has to be compulsorily converted into an annuity and this may not be in sync with the expectations formed before investing in NPS. 

Income Tax rules change

1. The last date for filing belated or revised ITR for FY 2018-19 (AY 2019-20) has now been extended till July 31st.
2. The due date for the income tax return for the FY 2019-20 (AY 2020-21) has been extended to 30th November 2020.
3. Deadline to link Aadhar number with Permanent Account Number, PAN has also been extended till March 31, 2021, from June 30, 2020.
4. The date for payment of self-assessment tax in the case of a taxpayer whose self-assessment tax liability is up to Rs. 1 Lakh has been extended to 30th November 2020. It has been clarified that no extension for the payment of self-assessment tax for the taxpayers with self-assessment tax liability exceeding Rs 1 lakh, in fact, these taxpayers will have to pay tax by the due dates specified in the Income Tax Act (IT Act) and delayed payment would attract interest under section 234A of the IT Act.
5. The date for making various tax-saving investments or expenditures to claim tax breaks under Chapter-VIA-B of the IT Act which includes section 80C (LIC, PPF, NSC etc.), 80D (Mediclaim), 80G (Donations) etc. has also been further extended to 31st July 2020. Hence the investment/ payment can be made up to 31st July 2020 for claiming the deduction under these sections for FY 2019-20.
6. With respect to capital gains the date for making an investment, construction or purchase for claiming rollover benefit or deduction under sections 54 to 54GB of the IT Act has also been further extended to 30th September 2020.

DOMESTIC ECONOMY

• The Wholesale Price Index fell 3.21% in May on an annual basis, the most since November 2015, after an increase of 0.42% in March’20. The drop in inflation was due to a fall in power and fuel prices.
• State-run and private banks disbursed loans worth nearly Rs.32,985 crores in a month to small businesses under the 100% Emergency Credit Line Guarantee Scheme for micro, medium and small enterprises on Rs 3 lakh crore as per the Finance Ministry. The lenders had sanctioned loans worth Rs.75,426 crores to such borrowers during the same period.
• Private banks seen between 30-40% of their loan book go under the moratorium, while NBFCs have seen a wide variation as disclosures by five large non-banks, over 40% of their respective assets under management were under moratorium as of the end of May 2020. Non-bank lenders have provided a loan moratorium to over 60% of their customers.
• As per the Tax collected until June 15—the last date for the first instalment of advance tax—there was a 1/3rd drop at Rs.92,681 crores compared with Rs.1.37 lakh crore collected in the same period last year. The total corporate tax collected during the period was Rs.36,033 crore, while personal income tax collection amounted to Rs.54,025 crores.
• The Modi government said it will spend Rs.50,000 crores ($6.6 billion) on creating temporary jobs in villages for millions of migrant workers who left cities after a nationwide lockdown was put in place to stem the spread of coronavirus. The 125-day jobs programme will be launched in villages across 116 districts in the six states of Uttar Pradesh, Madhya Pradesh, Rajasthan, Jharkhand, Odisha and Bihar, which is scheduled to go for polls in coming months. More than 25,000 returnee migrant workers across the six states have been chosen to be part of the plan, according to the statement.
• Fitch Ratings revised India’s long-term outlook to negative from stable, citing risks due to continued acceleration in the number of new Covid-19 cases as the country eases lockdown curbs. The coronavirus pandemic has significantly weakened India’s growth outlook for this year with economic activity expected to contract 5% in the current fiscal, before rebounding by 9.5% by 2021-22, the global credit rating agency said in a release, as it affirmed the country’s rating at ‘BBB-’.
• The Indian government has decided to revise the minimum support prices for 14 Kharif crops based on the formula by the commission for agricultural costs and prices. The price for these 14 crops ranges would imply a mark up from 50% to 83% over the cost.

COMPANY NEWS

• Reliance Industries Ltd. is closing in on a deal that would see it acquire stakes in some units of Future Group as per insider sources.
• The board of Bharti Airtel Ltd.'s tower unit further extended the merger of Bharti Infratel Ltd. and Indus Towers Ltd. till Aug. 31, according to an exchange filing. Each party retains the right to terminate and withdraw from the scheme, it said. Indus Towers is jointly owned by Bharti Infratel (42%), Vodafone Group Plc (42%), Vodafone Idea (11.15%) and U.S.-based asset management firm Providence Equity Partners (4.85%).
• Authority for Advance Rulings order on Walmart-Flipkart deal

Subject: the taxability of capital gains arising from investments made by U.S.-based private equity firm Tiger Global Management LLC in the Singapore-based holding company of Flipkart India. In 2018, Tiger Global’s Mauritian arm sold more than 26 million shares in Flipkart Singapore to a Luxembourg entity and had approached tax authorities to claim capital gains tax exemption under the India-Mauritius double tax avoidance agreement.

Ruling: The AAR observed that the Mauritian entities were set up only to derive benefit under the tax treaty and opined to deny the DTAA (Double Tax Anti Avoidance) treaty benefits as the DTAA can only apply to direct transfer of an Indian entity’s shares, it said while denying the treaty benefits.

• Experts said the ruling creates uncertainty among foreign investors who relied on the existing tax regime, which allowed treaty benefits on the basis of a tax residency certificate granted by the Mauritius government. It also further complicates the relevance of tax treaties for indirect transfers as in this case it was the transfer of the shares of Flipkart Singapore and not Flipkart India.

INTERNATIONAL MARKETS

• The US govt decided to freeze immigration and suspend work visas until the end of this year to protect American jobs. According to India’s IT industry body Nasscom, the new proclamation may force more work to be performed offshore since there is a dearth of highly skilled talent locally in the US.
• China temporarily has suspended the dispute with the EU after the WTO issued its interim report in 2019 ruling against the Chinese demand for market economy status. Beijing declined to restart the dispute before the deadline to do so expired on June 15. China decided to drop the matter after the WTO, in an interim ruling, rejected the argument that Beijing’s 2001 agreement to join the WTO automatically granted it the right to be treated as a market economy in anti-dumping investigations after 15 years. Now the EU members can apply anti-dumping duties on Chinese goods.
• The EU said that it could impose taxes on digital giants such as Google, Amazon and Facebook even without a global agreement by the year-end after the US exited talks thus sparking another round of fears of a new trade war. European countries say tech firms pay too little tax in countries where they do business because they can shift profits around the globe. US has resisted new unilateral taxes on Silicon Valley companies in the absence of an OECD (Organisation for Economic Co-operation and Development) deal. As per European Economic Commissioner Paolo Gentiloni, if the global deal is not arrived at, then, would go ahead with the introduction of tax without a deal.

DATA TABLES

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