NEW DELHI: Bids in the February 2015 spectrum auction are likely to skyrocket as the department of telecommunications (DoT) plans to auction just 800/900/1800 MHz spectrum bands, and not the vital 2100 MHz band spectrum that telcos were hoping for. Auctions for spectrum in the 2100 MHz band will take place only in May, and with no certainty about how much 2100 MHz spectrum would be available in the May auction, telcos will have no option but to bid very aggressively to retain their 900 MHz spectrum in February.
It is unclear if the bidding parameters will change after telecom minister Ravi Shankar Prasad’s meeting with defence minister Manohar Parrikar on Monday, but it is significant that Prasad’s ministry has been in talks for swapping spectrum with the defence ministry in the 2100 MHz band, vital for data services, and a substitute for telcos whose 900 MHz spectrum licences expire next year — auctions for these will be held in February 2015.
While the Telecom Regulatory Authority of India (Trai) has recommended postponing the spectrum auction if there isn’t enough spectrum in all bands — it has also recommended a defence-DoT spectrum swap to free up 15 MHz in the 2100 MHz spectrum band — this was rejected by the Telecom Commission on November 7.
Trai will reply to the Telecom Commission next fortnight, but Trai chairman Rahul Khullar has given media interviews reiterating his stance that not auctioning all spectrum together will prove disastrous for the industry, subscribers as well as the government. This stand of Trai’s has also been endorsed by the country’s top four mobile operators in a joint letter to Prasad and Prime Minister Narendra Modi.
Five days after the Telecom Commission rejected Trai’s recommendation, in a presentation to Prasad on November 12, DoT talked of a two-stage bid and merely mentioned that talks with the defence ministry to release 15 MHz of 2100 MHz frequency spectrum through a swap was under way along with the release of 5 MHz in 17 circles.
That it was hopeful of only the latter materialising was evident when it said “it has also been proposed to add Rs 5,000 crore as receipt for Auction of 5 MHz block in 2100 MHz band, subject to vacation of the same by Defence”.
The crux of the problem is that while in February 2014 roughly 90% of the spectrum auctioned was brand new, things will be the exact opposite in the February 2015 auction when just 10-15% of the spectrum will be new. A good example of what this will do in Maharashtra, to take one example, is that Vodafone could well see its business shut down in the state. Right now, Vodafone has 6.2 MHz of spectrum in the 900 MHz frequency band where its licence is running out later this year. If it is not able to win this back in the auction, its only fallback is 1800 MHz spectrum. But it has only 1.25 MHz of this spectrum and only another 2 MHz is available for auction. So Vodafone will bid whatever it takes for it to retain the 900 MHz spectrum, but it requires just one other telco to take the price higher and higher. Such examples can be multiplied manifold across various other telcos as well as licence circles.
According to DoT officials, the reason for holding a two-stage auction rather than go by Trai’s recommendation to hold it at one go, even if it means delaying the entire process, is because the government wants to balance its budget while taking into account the interests of the operators. While spectrum is available in 800, 1800 and 900 MHz, DoT is in talks with the defence ministry for vacation of 3G spectrum in the 2100 MHz band.
There are two components of its negotiations with the defence. The first relates to getting vacated 5 MHz spectrum in each of the 17 circles and the second is a swap proposal — take from defence 15 MHz in the 2100 MHz band and in lieu of it give it an equal amount in the 1900 MHz band. The resolution of this would take time — according to DoT’s timeline, this should be done by the end of December 2014. In such a scenario, holding auctions at one go in February would not be possible and deferring the entire process to the next fiscal would mean foregoing the receipts estimated in this year’s Budget.
(Source: The Financial Express, November 19, 2014)
COAL BLOCK AUCTION – POWER, STEEL COS WITH GOOD RECORD TO GET PREFERENCE
NEW DELHI: The government will give weightage to companies with existing power, steel or cement plants and experience in developing mines while auctioning coal blocks, according to officials aware of the rules being framed for the auction.
Preference will also be given to bidders on the basis of preparedness of their end-use plants, proximity of their projects to the mine, and their financial and past development records, they said. The government is expected to shortly issue the draft rules for auction of 204 coal blocks that were cancelled by the Supreme Court in September.
The rules will specify eligibility of companies for participating in the bidding, while the methodology for auction will be placed before the Union Cabinet for approval, a senior government official said.
“Companies with operating end-use plants or those which have made over 90 per cent investment in the associated projects will get priority during auction as these 74 mines are either producing or will soon become operational,” he said. Stakeholders’ comments will be sought on the draft rules that allow companies to use coal from a block in different end-use projects belonging to the same group. The companies will have to provide details of such projects while bidding.
Companies owning 42 operational coal mines will have to pay Rs 295 per tonne additional levy for the coal mined in two parts. The levy for coal mined till September 24 has to be submitted by December 31, while the balance for coal extracted till March 31, 2015, has to be paid by June 30, 2015.
The auction of coal blocks will be conducted in two stages—technical and commercial. Companies will have to meet the technical parameters to bid for the blocks.The government is expected to issue the tender documents for auction by December 15, giving details of grade of coal, geological reserves, extractable reserves and capacity of 74 coal blocks that will be offered in the first round of auction.
However, the rules are silent on statutory clearances. The companies will have to commit milestones for development of the mines at the time of signing the allocation letters.
Allocation letters, unlike in the past, will have comprehensive details about the blocks, end-use projects and the companies.
(Source: The Economic Times, November 19, 2014)
GREEN PANEL SUGGESTS NEW LAW FOR ENVIRONMENT PROJECT APPROVALS
NEW DELHI: A government-appointed panel headed by former cabinet secretary TSR Subramanian has questioned the environment clearance procedure saying more than 99 per cent of projects get cleared anyway, with little or no scrutiny despite taking anywhere up to three years, which means neither industry nor environment gains anything from the procedure. Instead, the committee has suggested a system that is strong on monitoring and compliance — two areas of weakness in the present system. The committee has recommended putting in place a new law for approving projects, monitoring compliance, and punishing violations.
The high-level panel, which was reviewing the environmental laws, regulations and rules, submitted its recommendations to Environment Minister Prakash Javadekar on Tuesday. The minister told ET, “Compliance will be the essence of the new architecture of the report, which will help us revamp the environment and forest clearance processes, and make it more transparent, and make decision making more efficient.”
Speaking to ET, Subramanian said, “There is need for change, to improve the processes through which projects are approved and monitored, and to ensure that environment also improves.” The former cabinet secretary said “the effort has been to reduce the inspector raj system” and use “technology to monitor and ensure compliance”.
He said the committee had built on the existing mechanisms to optimise the efforts to balance developmental imperatives causing least possible damage to environment.
Sources said the committee’s approach to the clearance process is based on the “principle of utmost good faith”. Project proponents will in a form of selfdeclaration set out the details of their project, the technology used, the level of emissions and pollutants, and the steps they will take to address the environmental consequences.
(Source: The Economic Times, November 19, 2014)
SHELL WINS TRANSFER-PRICING TAX DISPUTE IN BOMBAY HC
MUMBAI: The Bombay High Court on Tuesday ruled in favour of Shell in a transfer-pricing order that sought to tax the energy giant’s 2009 investment in its Indian subsidiary. The order will have an impact on other multinationals fighting the tax department on similar grounds.
The income-tax department had sought to add Rs 15,220 crore to Shell India’s taxable income after Shell Gas invested in its local arm at Rs 10 a share. The tax department valued Shell India’s shares at Rs 180 apiece in January 2013 and charged it with undervaluing those to evade tax.
Calling it a tax on foreign direct investment, Shell India moved the Bombay High Court in April last year. The court rejected the tax department’s argument that the Shell case was distinguishable from Vodafone’s case, which won a similar reprieve in October.
“The Shell India case is significant. It follows the earlier Vodafone judgment — the principle being that issuance of shares by an Indian company to its foreign parent is not exigible to transfer-pricing provisions, as there is no income arising therefrom,” said Mukesh Butani, managing partner of BMR Legal, which represented Shell India.
The Bombay High Court judges, M S Sanklecha and S C Gupte, set aside the tax department’s order over jurisdiction and did not get into the valuation of the shares.
Transfer pricing is the value at which companies trade products, services and assets among units in different countries, a regular part of business for a multinational but a practice tax authorities feel is often exploited. The rules require all cross-border transactions among group companies to be valued as if those were with an unrelated company.
“The decision is a relief not just for Shell but for all multinationals that have faced adjustments on share issuance. The court felt the tax department clearly exceeded its jurisdiction to bring to tax a capital transaction,” Butani added.
“Investors should welcome this bold intervention of the court. Hopefully, one of the tax thorns that troubled investors has been removed,” said Gokul Chaudhri, leader of the direct tax unit at BMR & Associates.
When contacted, a finance ministry official said: “The order has to be studied carefully. After that, we will decide whether there is a need to file a special leave petition in the Supreme Court.” He added a decision would be taken on merit.
The government has 90 days to appeal in the apex court. A view will be taken by the Central Board of Direct Taxes once the assessing officer sends his report to the chief commissioner. Sometimes, the matter is also referred to the law ministry and the process takes about two months.
In October, the Bombay High Court had ruled in favour of British telecom major Vodafone Group, saying it did not have to pay the extra Rs 3,200 crore tax demanded from the authorities. The government has not decided whether or not to appeal against the Vodafone judgment yet.
Tax experts welcomed Tuesday’s verdict. “It confirms the concept that the arm’s-length principle for determination of price of a transaction should be applied only when there is income, expense or interest involved,” said S P Singh, senior director at Deloitte Haskins & Sells.
“The tax department must undertake a systematic study of recent decisions from various appellate authorities and issue instructions to avoid frivolous additions. It is necessary that administrative solutions are sought. This will call for substantial review of the process of assessment and dispute resolution,” he added.
(Source: Business Standard, November 19, 2014)
MUTED CORPORATE LOAN DEMAND IMPACTS BANKS
KOLKATA: The fear of bad loans and limited lending opportunities to top companies have prompted several banks to shift focus towards the retail (individual loans) and small & medium enterprises segments
India Inc’s reluctance to borrow money is keeping bankers worried. While lenders were able to stem fresh impairment in their credit quality in the July-September period, low demand for corporate loans has decelerated the growth in banks’ interest income, restricting improvement in their profitability.
The fear of bad loans and limited lending opportunities to top companies have prompted several banks to shift focus towards the retail (individual loans) and small & medium enterprises segments. However, analysts believe this shift in strategy is not working well for many.
M B Mahesh, analyst with Kotak Securities, said in a note to clients on Monday: “We believe this is likely to be the biggest source of concern in 2014-15, as fresh sanctions have not shown improvements, repayments are increasing from existing loans and retail – where banks have shifted focus – contributes to only 20 per cent of overall loans.”
The year-on-year growth in non-food credit moderated to 11.2 per cent (its lowest level since June 2001) at the end of this financial year’s second quarter. Bankers say companies are increasingly raising money through alternative sources such as commercial paper. Finance from other non-bank sources such as foreign direct investment and external commercial borrowing has also risen.
The slowing in credit growth is more pronounced in state-run banks. Analysts feel this trend is likely to continue in the coming quarters.
With banks unwilling to pare lending rates despite low demand, the net interest margin has remained stable for most lenders. However, analysts fear the margin could weaken in the coming quarters, as bargaining power is expected to remain in favour of borrowers. Also, on the retail side, the bulk of the growth is coming from housing loans, where yields are low.
Credit quality has remained stable, with the economy showing signs of recovery and lenders turning cautious in offering fresh advances. Retail asset quality was firm and improved further with normalcy returning in banks’ commercial vehicle finance book.
Analysts, however, warn that there are still reasons to remain cautious on impairment ratios and a sustainable improvement in asset quality might not happen soon.
Manish Chowdhary, analyst with IDFC Securities, noted in his second quarter earnings review report: “Asset quality was mixed – slippages were slightly lower but restructurings were higher. Credit costs were higher than our expectations and there were signs that stress would persist in the near term, as total stressed assets continued to increase.”
A few experts felt non-interest income would continue to lead banks earnings growth in the near term. With yields showing a softening bias, many expect the contribution from treasury operations to increase from current levels. Also, retail fees have shown an improvement, aided by pick-up in third-party distribution income. “Improvement in fee income growth could be a key earnings support in the medium term if the trend sustains,” Chowdhary said.
Also, said analysts, after the recent rally in the local share market, bank stocks’ valuation appears expensive. “Given the strong price run-up, we see moderate risk-reward in the near term…Our price targets also now imply a lower upside of five to 15 per cent, based on the March 2016 book,” Nitin Kumar, analyst with Prabhudas Lilladher, said in its report on private banks earlier this month.
He expects the positive influence of improving macroeconomic drivers (such as lending rates and inflation) on banking stocks to be visible only over the medium term.
(Source: Business Standard, November 19, 2014)
