inNEW DELHI: After clarity on natural gas prices and an ordinance on coal, the government is set to decide on pooling of imported and domestic fuel prices to help stressed power stations with a combined capacity of 91,000 mw generate electricity that’s badly needed as India tries to revive its economy. The Cabinet Committee on Economic Affairs is likely to decide on pooling gas and coal prices at its meeting this week, sources said.


The proposals include a bailout package for power plants idling due to scarcity of domestic gas and a plan to meet the needs of coal-based units till 2017. Of the 24,148 mw gas-based projects set up at an investment of about Rs 1,50,000 crore, those that can generate about 16,000 mw aren’t running while the rest are operating at sub-optimal levels. Pooling of gas and coal on cards: Government plans to fuel up 91K MW of stuck power projects The Supreme Court on September 24 cancelled 204 coal mine allotments of which 59 were to supply power plants with nearly 67,000 mw capacity. The 59 include 20 producing blocks supplying projects of more than 11,000 mw capacity. Plants that can produce another 7,200 mw have stalled as Coal India supplies have dried up. The government had on October 18 raised the price of gas from domestic fields by about 33% to $5.6 per unit from November 1.


Three days later, it said an ordinance would be issued to open coal to commercial mining by private firms and allot captive coal blocks to private companies through eauctions and on a nomination basis to government entities. The government now proposes to supply any additional gas produced in the country in the next four years to power stations along with imported liquefied natural gas. State-run GAIL India will be the pool operator and will supply the fuel to power stations at an average ‘pooled’ price of domestic and imported gas.


The electricity from the plants will be supplied to power distribution companies at Rs 5.5 per unit. The government also proposes to subsidise firms operating gasbased power stations from the National Clean Energy Fund (NCEF) made up of a cess collected from coal miners. After much deliberation, the fixed cost of the gas-based plants is planned to be capped at Rs 1.30 per unit of electricity that will allow the operating companies to meet financial obligations and prevent idle projects, totaling an investment of Rs 64,000 crore, from turning into non-performing assets.


The plan includes simplifying procedures for availing customs duty waivers on LNG and scrapping value-added tax and central sales tax collected by states. Gas transporters GAIL India and Reliance Gas Transportation Infrastructure Ltd will be asked to take a 20% cut in pipeline tariff, which will help them improve utilisation of pipelines. GAIL will also be asked to halve its marketing margin to $0.1 per million British thermal unit.


A separate plan to provide longterm coal supplies to developers of power plants that have had their attached coal mines cancelled by the apex court is also likely to be considered by the Union Cabinet this week. The power ministry proposes such supplies to captive block based power projects that have secured debt, placed equipment orders and acquired land.


The proposal will immediately benefit power plants of about 36,000 mw combined capacity that are ready or likely to be commissioned by March 2017. Under the proposal, power plants with a total capacity of 78,000 mw that have signed letters of assurance with Coal India will get 90% of their requirement. Fuel supplies have also been sought for plants that can generate up to 21,000 mw that are set to begin operations after 2017 and have letters of assurance from Coal India.


The ministry has sought 50% fuel supplies from Coal India for projects that do not have letters of assurance from the company but have signed power purchase agreements ( PPAs) with states. If required, Coal India will supply imported coal to such projects after pooling prices with locally produced coal.

(Source: The Economic Times, October 27, 2014)




FRANKFURT: Twenty-five banks including Italy’s Banca Monte dei Paschi di Siena SpA failed a stress test led by the European Central Bank, which said almost half of them must act to raise more capital. The central bank in Frankfurt identified a 25 billion-euro shortfall ($32 billion) for the region’s lenders, and said 12 of them have now raised enough funds. Eleven banks need more capital, including Monte Paschi with a gap of 2.1 billion euros.


“Although this should restore some confidence and stability to the market, we are still far from a solution to the banking crisis and the challenges facing the banking sector,” Colin Brereton, economic crisis response lead partner at PwC, said in an e-mailed statement. “The Comprehensive Assessment has bought time for some for Europe’s banks.” That two-part exam, comprising an Asset-Quality Review of balance sheets as of Dec. 31, 2013, and a stress test, forms one pillar of the ECB’s drive to move the euro zone forward after half a decade of financial turmoil by making its impact on the banking system transparent.


Banks will have from six to nine months to fill the gaps and have been urged to tap financial markets first. The ECB’s stress test was conducted in tandem with the London-based European Banking Authority. The EBA’s sample largely overlaps the ECB’s, though it also contains banks from outside the euro area.


The ECB assessment showed Italian banks in particular are in need of more funds as they cope with bad loans and the country’s third recession since 2008. Monte Paschi, Italy’s third-biggest bank, Banca Carige SpA and two other smaller cooperative lenders have a combined 3.3 billion-euro gap that must be replenished because the measures taken this year weren’t sufficient, the Bank of Italy said in a statement today. “The minister is confident that the residual shortfalls will be covered through further market transactions and that the high transparency guaranteed by the Comprehensive Assessment will allow to easily complete such transactions,” Italy’s finance ministry said in a statement. Of the 13 banks that the ECB identified as having not raised enough capital, two Greek ones are exempted because their repair plans are already in progress.


“The Comprehensive Assessment allowed us to compare banks across borders and business models,” ECB Supervisory Board Chair Daniele Nouy said in a statement. “The findings will enable us to draw insights and conclusions for supervision going forward.” The ECB said lenders will need to adjust their asset valuations by 48 billion euros, taking into account the reclassification of an extra 136 billion euros of loans as non performing.


The stock of bad loans in the euro-area banking system now stands at 879 billion euros, the report said. Italian banks will have to implement the largest asset-value adjustments according to the findings of the review, equivalent to 12 billion euros. Greek banks will have to revalue by 7.6 billion euros, and German banks by 6.7 billion euros, the report showed. Italian lenders were buffeted by the stress test, suffering a hit to capital of 35.5 billion euros, followed by French banks with 30.8 billion euros.


German banks would see capital reduced by 27 billion euros in the stress scenario, the report said. Under the simulated recession set out in the assessment’s stress test, banks’ common equity Tier 1 capital would be depleted by 263 billion euros, or by 4 percentage points. The median CET1 ratio –a key measure of financial strength –would therefore fall to 8.3% from 12.4%. Nouy has said banks will be required to cover any capital shortfalls revealed by the assessment, “primarily from private sources.”

(Source: The Economic Times, October 27, 2014)




NEW DELHI: To revive investment in the road sector, the Union government has come up with a new bidding strategy. The same stretches of national highway projects are now being offered in both government and privately funded modes. The National Highways Authority of India (NHAI) has invited rebids for four projects under the build, operate and transfer (BOT) mode, even as bidding under the EPC (engineering, procurement, construction) mode, where the government funds a project, is on simultaneously. These projects were earlier put up for bidding in PPP mode but found no takers. Subsequently, decisions were taken to award these projects in EPC mode. “About four projects have been rebid in PPP mode as some investors have shown interest. But, decisions were already taken to award these projects in EPC mode; so, now bidding in both modes is running simultaneously,” a senior NHAI official told Business Standard.


The idea is to save time in awarding projects, as there have been delays because of there being no takers in the previous round of bidding, the official added.


A few foreign investors, including IJM Corporation Berhad, a leading construction group in Malaysia, have shown interest in certain projects – Eastern Peripheral Expressway worth Rs 4,489 crore for a stretch of 135 km, Bathinda-Amritsar worth Rs 1,899 crore for a stretch of 175 km and Ambala-Kaithal for about 95 km worth Rs 878 crore.


Among the biggest projects that has been rebid is the Eastern Peripheral Expressway, to be built between Sonepat in Haryana to Palwal in Uttar Pradesh, bypassing Delhi. The bids have again been called under BOT mode as one unit. For EPC, the project has been divided into three packages, which will further be divided into a total of six parts. In the current financial year, NHAI has awarded 1,138 km of road projects, of which 511 km (three projects) has been awarded under BOT mode of public-private partnership, according to another NHAI official. This fiscal year, the target is to award 3,700 km through PPP and 2,300 km through EPC mode. Developers had bid aggressively during 2010-2012, when the government awarded a record 147 road projects worth Rs 1.47-lakh crore. At that time, India’s economic growth was much higher but it slowed subsequently and input and inflationary costs have gone up since, due to which the award of contracts for national highways has slowed down and there is less of interest from the private sector. Besides, issues related to environment and forest clearances, and land acquisition have come in the way of projects. Projects worth Rs 1,80,000 crore have been stuck due to various problems.

(Source: Business Standard, October 27, 2014)




MUMBAI: The Union government’s move on Saturday regarding domestic manufacture of submarines will be a shot in the arm for companies already in talks with multinational corporations (MNCs) for the technology to do so.


For the project in question, of building six conventional subs, four MNCs are interested in providing technology and supervising production, with equity participation. DCNS of France, Kockums of Sweden, Rosoboron Export of Russia and ThyssenKrupp of Germany are interested in partnering with Indian companies and have initiated talks, say industry sources. On Saturday, the government cleared a proposal to build six Stealth subs, which could each cost Rs 50,000-60,000 crore. The MNCs are enthused that the Modi government has cleared 49 per cent equity participation in the sector by foreign companies in an Indian joint venture. If a foreign company agrees to transfer technology, then it can apply for a higher equity cap in the venture. At present, Mazagon Dock in this city is building Scorpenes under what is termed Project P75I, with the collaboration of DCNS. The project is five years behind schedule. The government clearance will clearly benefit India’s largest private shipyards, such as Pipavav Defence in Gujarat and Larsen & Toubro’s in Katupalli, Tamil Nadu. Pipavav has a distinct advantage due to availability of a large and operational dry dock, say its officials. L&T has also welcomed the government’s move to allow private sector companies to bid.


There has been a seven-year delay in deciding on the proposal. In this time, the navy has gone through a tough time, including an accident on two of its Russia-made subs, with the loss of 24 lives. One sank in Mumbai dock and the second was heavily damaged. Till now, refits of subs have been a monopoly of state-owned Mazagon and Hindustan Shipyard. Yet, in 11 years, the latter has not even delivered one refit. Mazagon has an order book of over Rs 1 lakh crore, comprising frigates, destroyers and subs. It, too, says the Union comptroller and auditor general, has a time and cost overrun issue in delivering naval warships.

(Source: Business Standard, October 27, 2014)




NEW DELHI: The Narendra Modi government has been keen to disavow the legacy of the retrospective amendments to tax laws that have drawn flak from global investors and asserted the tax policy would now be non-adversarial and bereft of uncertainty. However, it doesn’t seem to walk the talk. Telecom giant Vodafone’s court victory earlier this month in a share valuation tax dispute is set to pave the way for another major amendment to the Income Tax Act – this time, only with prospective effect.


After the Bombay High Court earlier this month struck down tax authorities’ move to tax Vodafone India for selling shares at a discount to its overseas parent, the finance ministry is considering making prospective changes in the law to tax any shortfall or premium on the fair value of shares that change hands in cross-border capital transactions, according to sources.


The proposed amendment will, however not affect the 25 cases already in courts including those of Shell India Markets, Essar group companies, Bharti Airtel and the two Vodafone cases on which the court has already given its verdict.


On October 10 and 13, the court had set aside separate show cause notices to Vodafone India Services Pvt Ltd seeking to add about R5,000 crore to its income for two financial years, 2008-09 and 2009-10 on account of the alleged undervaluation of shares sold to its Singapore parent. The court’s justification was that the law does not expressly classify as income any shortfall or premium involved in international capital transactions between associated enterprises.


The finance ministry’s idea is to introduce an express provision to support such tax claims in section 2 (24) of the Income Tax Act that enumerates specified profits, gains and capital gains that are taxed as income.


In the case of domestic transactions, share premium received by closely held entities had been made taxable from April 1, 2013, by bringing it under the classification of income from other sources, although it is in the nature of a capital receipt.


This “legal fiction” classifying share premium as income is unique to India, said Vijay Iyer, National Leader for Transfer Pricing, EY. The intent in this case was to discourage shifting of corporate income to closely held entities of promoters by way of paying huge premiums for the shares of those promoter held entities. Also, from June 2010 onwards, the law allows taxation of shortfall in fair market value of shares involved in transactions between closely held firms, treating it as income from other sources.


Sources explained the Bombay High Court ruled in favour of Vodafone in the absence of any such express provision in law covering cross-border share deals at prices below the fair value of the shares. “We will examine the court order once we get comments from the assessing officer. If any clarifications are needed in the Income Tax Act on income directly or indirectly attributable to certain share transactions, we will make them,” said a person privy to the government’s thinking.


Another person closely associated with the Vodafone case said that the Income Tax Department has little choice than appealing against the High Court order to the Supreme Court, “considering the high stakes involved.” There are about 25 other pending tax disputes on intra-group share sales, some of which involve very high additions to taxable income.


After the I-T Department started issuing show cause notices to MNCs for alleged mispricing of shares sold to global parents, many companies made it part of their due diligence to go for advance pricing agreements with the tax department on the valuation to avoid a future tax dispute.


Recharacterising a capital receipt as income is a rare practice among tax authorities although there are a few countries that provide for it in their ‘thin capitalization rules’. Those rules are meant to discourage setting up companies with very limited equity and excessive borrowings which would deny the authorities revenue from dividend taxes, while deductions on interest cost would keep corporate income tax incidence low. India does not have such norms in tax law. “Levying tax on capital would not auger well for foreign direct investment. It goes against the spirit of everything the government is doing to win back investor confidence,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.


In the case of Vodafone India, the tax department considered the gap between issue price of shares and what it deemed as its fair value, as income, treating it as the cost of fiscal benefit extended to the parent. The department attempted to present this gap as a loan extended to the foreign parent on which the Indian unit stands to gain taxable interest income. It relied on the norm that income from international transactions have to be determined having regard to their arms length price (fair market value of shares in this case). “The revenue departme-nt’s approach was unprecedented, not in line with business realities, certainly not founded in law,” said SP Singh, Senior Director at Deloitte in India.

(Source: The Financial Express, October 27, 2014)

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