23.10.2010

Politics & the Nation

• MFIs don't get the kind of relief that they are seeking from the court against the AP ordinance
• You might be aware that AP became the first state in the country to come out with an ordinance which tries to rein in some of the unethical practices being indulged in by the MFIs.  
• SKS Microfinance, the country’s largest MFI, industry body Microfinance Network, and Spandana, the second-largest firm—had filed a plea on Monday asking the court to declare the ordinance as “null and void”, and “beyond the legislative competence of the Andhra Pradesh legislature”.
• The Andhra Pradesh High Court on Friday declined to stay the ordinance on microfinance firms issued by the state government, and asked the companies to comply with certain key provisions of the law.
• In an interim order, the court said MFIs should register themselves with the Andhra Pradesh district authorities within one week; the firms cannot use coercive tactics to recover money; and the interest charged cannot exceed the principal loan amount.
• MFIs, which have been at the receiving end of much criticism over their alleged strong-arm methods and usurious rates, however, got some relief with the court saying they can continue to carry out normal business.
• The companies had protested that banking is the exclusive domain of Parliament, and that their activities are governed by the Reserve Bank of India Act.
• The national implications of this case will only get clearer with the final order that is expected after two weeks. If it does not stay or suspend the ordinance, other states may think of enacting similar laws to supervise or regulate finance companies.
• So far, banks and finance companies have operated under the belief that their activities are covered by the various laws enacted by the Centre. However, some southern states have already passed laws governing finance companies and the courts have held them to be valid.
• In 2007, the Kerala High Court held that the provisions of the Kerala Money Lenders Act were applicable to non-banking financial service companies. Justice Balakrishnan Nair ruled that the provisions of the state law are meant to safeguard the interests of the borrowers and dismissed the petitioners’ claim that NBFCs cannot be governed by state laws.
• In March 2007, Justice P Dinakaran also gave a similar ruling on the Tamil Nadu Protection of Depositors (Financial Establishments) Act, 1997. The order upheld the law and dismissed a petition claiming that the state does not have legislative competence to regulate finance companies.
• The Supreme Court faulted on using the word 'keep'
• In an interesting turn of events, the Supreme Court was faulted for using the word 'keep' in its judgement regarding live-in relationships.  Take a look at this news story.  Worth a read.

Finance & Economy

• I-T dept raises Rs. 11,000cr tax demand on Vodafone
• The battle between tax authorities and telecom major Vodafone is nearing its climax.
• The income tax (I-T)department on Friday raised a demand of over Rs. 11,000 crore on Vodafone International Holdings BV, on account of its $11-billion deal to acquire Indian telecom firm Hutchison Essar in 2007.
• Whether Vodafone will have to eventually cough up the tax will be decided by the Supreme Court after it resumes hearing on the case on October 25.
• The final outcome of the tax dispute will influence the pricing and structure of all future crossborder M&A deals.
• The I-T demand follows the apex court’s direction last month to quantify the tax demand on Vodafone. The Supreme Court gave its order while hearing Vodafone's appeal against the Bombay High Court ruling that upheld the I-T department's position that it has jurisdiction to tax the cross-border acquisition.
• The tax department claims it has the jurisdiction on the M&A deal because the company and the business that was sold was based in India, even though the transaction happened offshore between two non-residents. The high court had turned down Vodafone's argument that no tax was payable locally as the transaction had no "territorial nexus" with India.
• According to the income-tax department, since Vodafone did not deduct tax while making payment to Hutchison, the liability to pay the tax falls on Vodafone. The I-T department also claimed that Vodafone was informed in advance about the tax liability arising in India on account of its acquisition of Hutch Essar, even while the government was processing its foreign investment application.

• Look at how the government is a giving a boost to core financing
• Government is looking at the possibility of increasng the cap on IIFCL's ability to fund the overseas borrowing of infrastructure companies.  At present it can fund only 20% of an infrastructure company's total overseas borrowing for capital expenditure.  Reprotedly it is considering enhancing the cap upto 50%.
• You might remember that IIFCL (India Infrastructure Finance Corporation Limited) was set up in 2006 to take a lead in funding infrastructure projects using a part of the country's forex reserves.  The company has a credit line of $5 billion from the RBI and has disbursed around $500 million.
• It had set up a UK subsidiary in April 2008 to channel the country's foreign exchange reserves into creation of physical assets by funding capital expenditure.
• With investments of about $514 billion required in the infrastructure sector in the Eleventh Plan period, it has an important role to play in funding for infrastructure.
• IIFCL chairman SK Goel
• IIFCL CEO Pradeep Kumar

• On increasing the voting power of emerging nations in the IMF
• While replying to questions on the International Monetary Fund (IMF) quota reforms, our Finance Minister Mr. Mukherjee said that although the reforms were agreed in 2008, several countries were yet to ratify increased voting power for the emerging nations.
• As many as 112 countries have to ratify the quota reforms, though only 81-82 countries have done it so far.  The reforms that seek to give additional 5 per cent voting power to emerging nations will not come into effect unless the requisite number of countries ratify them.

• Business models for mobile remittances
• Excerpted from today's good op-ed in ET:
• The remittance services provider (RSP) dominated model: Many RSPs (a bank or a money transfer operator) can adopt a direct-to-consumer model, using the telecom operator’s network for transport. The remittance service extends a mobile money account facility to consumers, which is used to transact remittances over the phone. While banked consumers benefit from more convenient access points, the mobile phone here becomes a channel for the hitherto unbanked users to gain and use a bank account.
• The operator-dominated model: In the operator-led model, customers do not deal with a bank. Rather than deposit and withdraw money from a bank account, customers exchange their cash for money stored in a mobile money account on the telecom operator’s server, which is not linked to any bank account in the individual’s name. Customers can send the money to others or use it to store funds for future use. They can also convert it back to cash at any participating retail agent. The network operator performs a role similar to a bank in the bankled model — designing remittance products, contracting retail agents directly or through intermediaries, and maintaining customers’ virtual accounts.
• The partnership model: Mobile network operators forge partnerships with banks or RSPs to efficiently handle cash management and disbursement. Banks exploit the distribution reach of mobile networks to market services among underpenetrated customer segments while mobile network operators benefit from the banks’ domain expertise.

International

• US refuses intervention in Kashmir issue; asks Pak to talk to India
• In a clear snub to Pakistan, the United States has refused to intervene in the Kashmir issue saying the dispute should be resolved bilaterally between New Delhi and Islamabad.
• The Obama administration also told a visiting Pakistani delegation to stop terrorists that pose a threat to India and Afghanistan.
• Over the last two months Pakistan has renewed its efforts to internationalise the Kashmir problem and even used the protests in the Kashmir Valley to prove that the state government did not enjoy popular support. The campaign had been stepped up especially ahead of US president Barack Obama’s India visit next month. The United States, however, has refused to bite the bait.