In the wake of India signing the amended tax treaty with Mauritius, P-Notes have come under the spotlight. P-Notes are instruments issued by FIIs to overseas investors who aren't registered with Sebi. As such they are a source of irritiant because the names of investors are often hidden under layers of anonymity.
Speaking to CNBC-TV18, Shaktikanta Das, Economic Affairs Secretary, said announcements made regarding P-notes won't upset the market.
"We won't create a cumbersome procedure which puts off the market," he said, adding that a careful balance will have to be found. Market regulator SEBI will consult market players, he said.
Regarding the Know Your Customer norms that investors will have to meet when instruments exchange hands under this tweaked treaty, Das said the guidelines already exist. SEBI has fine-tuned them and made them more robust. "Only the loopholes will have to be addressed."Below is the verbatim transcript of Shaktikanta Das’s interview with Shereen Bhan on CNBC-TV18. Q: Since the markets are trading at this point in time and there is some degree of nervousness and anxiety on the issue of participatory notes (P-Notes) let me start by asking you about that because we understand that there is a board meeting of Securities and Exchange Board of India (SEBI) on 20th and the P-Notes issue is going to be discussed at that board meeting. We do know what the Special Investigative Team (SIT) had recommended; I remember you had a conversation with me the day the SIT recommendations had come out on P-Notes saying that the markets have no need to worry, the government will not take any knee-jerk reaction. What should we expect on P-Notes? A: So far as P-Notes are concerned, as I had told you earlier, it will be done in a manner that will not upset the market. SEBI has already held consultations with various market players and whatever will be done, will be done in consultation with the market players. The regime has to be transparent enough and should be effective enough to get all the information. At the same time, we don’t want to create any cumbersome procedure or too much of an intrusive procedure which sort of puts off the market. So, therefore a careful balance has to be found and let me say that whatever we do, whatever SEBI does will be done in consultation with the various market players. Q: That is good to hear but let me ask you in terms of specifics now, because if one looks at the SIT recommendations and one understands that SEBI is looking at the possibility of implementing certain of those recommendations, in terms of the beneficial ownership issue and whether know your customer (KYC) should be made mandatory for P-Notes issue as at least above a certain threshold for individuals and a certain threshold for companies or firms, what is the decision that has been taken at least in consultation with the market regulator, where does Finance Ministry stand on this? A: The decision will be taken in the SEBI board meeting after detailed discussion with all the members present and no decision has been taken as yet. It will be discussed and a decision arrived at and at this point of time it will not be appropriate on my part to go into the details. Q: Do you believe KYC should be made mandatory for P-Notes? A: SEBI has a robust KYC mechanism. In fact over the last two years, SEBI has already fine tuned its KYC regime and it has been made fairly robust. We will see if there are few loopholes here and there or few gaps here and there. Only those issues need to be addressed. It is not as if we are trying to bring in a completely new regime, which sort of creates difficulty for market players. Having said that, let me also add that the fact that we now have an revised protocol, signed with Mauritius, with regards to the double taxation avoidance, I think a lot of the concerns which the SIT had or a lot of the concerns that we have in our fight against black money, I think they will get addressed because of the revised protocol. Q: One of the other key recommendations that the SIT or the concerned was this business of transferability. Are you going to be looking at that, is there likely to be any change as far as the transferability of Overseas Direct Investments (ODI) are concerned within the P-Note regime? A: You will have to wait for that. That is under discussion so it is not proper for me to give out the details. Q: The Finance Minister said whether it is Mauritius or P-Notes, it will be done in a phased manner. What should we expect now starting the May 20 which is when the SEBI board will meet to take up the issue of P-Notes? A: May 20 SEBI board, we will have a discussion. Now what decision, what will be the outcome that you will have to wait. We might as well decide to hold further consultations. So, it is not as if we are going to decide something on the May 20. Q: That is very important; you are saying that there may not be a final decision on the May 20 as far as the tweaking as you said of the P-Notes regime? A: I am saying there may or may not be a decision. If it is considered necessary we may decide to hold further consultations, but we will have to wait for May 20. Q: What is the sense that you get as of today, would you need further consultations on this issue? A: No, I don’t think I would like to go into the details. Q: Let me then ask you as far as the Mauritius treaty is concerned. The government has been trying to allay concerns on the impact of the amendments that have been now implemented but on the specifics as far as convertible debentures, non convertible debentures, exchange traded derivatives, etc are concerned, will the amendments apply or not, will they be taxable post April 1 2017? A: The amended protocol is very clear. So far as shares are concerned, there is no doubt. Then there are two other categories of instruments, one is immovable property and the other one is other instrument. Immovable properties, the right to tax is in the host country that is where the immovable property is located. With regard to the other kinds of instruments, which would include various kinds of convertible instruments, that the right to tax, that is in the country of origin. So, therefore that has been the practice, that is the ingredient in all our double taxation avoidance agreement (DTAA), the right to tax, that component, is with the country of origin; that is residence base. Q: So debts and convertible instruments will be exempt from this new regime starting April 1 2017? A: Central Board of Direct Taxes (CBDT) will in due course issue certain clarifications but as long as instruments have a debt character, as long as instruments do not have the character of a share, they will be taxed in the host country meaning in the country of origin. Q: Linked to that of course are the changes proposed now for Singapore because you said very clearly that Singapore is linked now to Mauritius. So, when do we expect now the amendments as far as the Singapore Treaty is concerned? A: These are two sovereign countries. Now, Singapore amendment, the Singapore protocol says that it will be coterminous; it will basically be a mirror image of what we do in the case of Mauritius. Singapore is a sovereign country so therefore the process of negotiation has to be initiated with Singapore now and I would expect this to be taken to a logical conclusion very quickly. Q: Within this financial year? A: I would not like to give a timeline but it should be a very simple process of negotiation. From our side we would like to do it as quickly as possible because this differential taxation regime between various tax jurisdictions, that should go because the whole idea is to create a level playing field between all countries and also a level playing field between investors who come through these jurisdictions and our domestic investors. Q: I know that that the Finance Ministry is being meeting with foreign portfolio investment (FPIs), trying to allay concerns, people like Mark Mobius have expressed concerns of foreign investors putting in money into India post the amendments as part of the Mauritius Treaty, domestic investors like Rakesh Jhunjhunwala on CNBC-TV18 welcoming the move by the government calling it a sensible decision but do you fear that foreign investors may in fact be deterred from putting in money into India post this and what have been the conversation that the Finance Ministry has had with them? A: India of 2016 is far different from India of 1983 when we entered into this protocol. Today, India stands on its own legs. It is a robust economy with very strong fundamentals. The economy has inherent resilient factors. We are focusing on strengthening the firewalls as the Finance Minister has said so in the Budget speech. Among the various investment destinations, especially emerging economies, India is perhaps one of the very few countries which is showing a robust growth. Indian markets are giving a good return so we are no longer in a situation where we need to give a discount to an investor to come into India. Q: But you were talking about the Indian market giving return. If I were to look at the picture between March 2015 and today, the Nifty is actually off about 14 percent from the March high of 9,000 plus and if I were to even take a look at the 2015 performance the markets are actually down in dollar terms? A: You have to compare with the percentage returns which the other markets world over have offered, you see the Indian growth we have come back to 7 percent plus and we say that it is robust in the context of growth that is witnessed in elsewhere in the world, so at 7.5-7.6 percent we feel it’s a robust and not just we, but the analyst world over. Comparatively it is a robust growth. Similarly, the returns our markets are offering are far better compare to the other markets. The Mauritius treaty is said to be silent on taxing gains from sale of derivates and debentures. Das said as far as share sale goes, the tax rules are clear. Two other categories of assets, namely 'immovable property' and 'other instruments' will have clear rules, too. "The host country will have the right to tax immovable property and the origin country will tax other instruments," he said.
After the Mauritius treaty, India's tax deal with Singapore wil undergo a similar shake-up. "It should be a simple process of negotiation with Singapore, Das said. On the question of whether Mauritius treaty will act as a deterrent to FIIs, Das said India's growth story is strong enough to attract them. "Indian markets are giving good returns. We are no longer in a situation where we have to give discounts." Q: Let me ask you about growth since you talked about it. It is a confusing picture that we get in terms of growth numbers. If you look at the March IIP numbers, much below expectations, coming in at just about 0.1 percent. Manufacturing has slipped back into negative, export performance 18th month straight decline that we are seeing. Of course trade deficit has come in at a five year low. Non-oil imports are also down. So, what should we make, even your indirect tax collections which I know the government is very happy about, but stripped off all the cesses and the excise duty hikes they are up just about 17 percent. So, it still continues to show a patchy and a confusing picture as far as the economy is concerned? A: We live in a globalised world. The decline in exports is moving in tandem with the contraction of world trade. You have to look at the total world demand which has today gone down. Overall when there is a contraction in world trade naturally it gets reflected in exports of all countries. So, naturally there is a decline in exports in value terms. With regards to the industrial numbers, the growth numbers which you mentioned, it is mainly due to the fact that the input costs have also come down. The commodity prices, the input costs have also come down. So, therefore statistically when you analyse it, it has got some bearing in terms of lower value addition. So, let us not get too technical but this is what the analysts have told. Let us look at the automobile sales in the last 3-4 months for example. Let us look at the sale of cement in first quarter of this calendar year. Let us look at the kind of road construction projects which are being undertaken, the kind of steel demand and the kind of cement demand that it has led to. Let us look at the overall steel sector which was in distress, today steel sector looks far more stable than it did about a year ago. Therefore there are greenshoots, there are signs of improvement. You cannot expect ourselves to be not at all impacted by what is happening all around us. Given a turbulent global economic environment, I think India is performing very well. The Budget has taken a very strong initiative in many of these sectors. So, we would expect, if we get a good monsoon which we hope we will, I think we are looking at growth close to 8 percent. Q: You are looking at a growth close to 8 percent if the monsoon delivers? A: Yes. Q: In terms of specific sectors, you talked about steel and there has been a lot of talk around financial restructuring package for steel, the finance ministry has been in consultation with the steel ministry as well as the Niti Aayog. Where do things currently stand on that front? A: Steel already the import duties has been increased to 12.5 percent. Then there is a safeguard duty. The anti-dumping proceedings are already under consideration by the concerned authorities. With regards to the restructuring of the loans, it is a function between individual steel company and the banks. Many of the steel companies I am told, already some of them have done it, they are stripping their other assets. They are offloading their other assets and taking steps to repay the bank loans. So, it is a process of discussion between the banks and the steel companies. Going forward I think we should see resolution of many of these issues. Q: So, there is no financial restructuring package that is likely now for steel, at least for now? A: Package - if something comes you will have to wait. I cannot prejudge what the government or the cabinet would decide. Q: Let me also ask you about where things stand now, the bank board bureau has been meeting, Vinod Rai has held a meeting with public sector banks, asking them to step up lending. There has been a lot of talk about NPA committee and so on and so forth. Can you shed more light now on what we can expect as far as the attack on NPAs is concerned? A: Banking sector NPA was a major challenge that the government had to deal with. So, in the Budget therefore the Finance Minister has come out with a very strong message apart from providing Rs 25000 crore of equity support, there was very strong message that if additional top up equity is required, it would be provided. The Reserve Bank of India (RBI) has also done some reclassification which has brought in about Rs 35000-37000 crore of tier I capital into the banks. The bank board bureau has been constituted, they are also dealing with this problem of stressed assets. Now the bankruptcy law has been passed. The Asset Reconstruction Companies (ARC) also 100 percent FDI has also been allowed. The sponsors now can hold upto 100 percent. All the instrumentalities of government intervention, all the instrumentalities of policy intervention in the banking sector have been addressed. I think the recoveries also are looking up. The banks are taking steps. If you look at individual cases the banks are already in the process of recovering it. So, I think the problem of stressed assets in bank looks to have come more or less under control. Q: Can you take us through how soon we can actually see Bankruptcy Act getting implemented on the ground? When do we see the bankruptcy board for instance being setup, what can we expect now in terms of action to actually make sure that we start to enforce it? A: So far as the bankruptcy law is concerned I must mention before I go into the details which you were asking, let me mention there are two points which I think need to be highlighted and which I think I have not seen any section of the media reporting it at least, number one, this will make Indian economy far more efficient. Number two, it will ensure a more productive use of capital that is deployed in the Indian economy. Today what is happening is that there is an inefficiency around the resolution of financial distress in corporate. LLPs, partnership firms, it takes months and years together and the problems don\\'t get resolved. By the time the companies don\\'t get restructured and by the time you go for liquidation very little value is left in the asset. Today it is a time bound process and it will be done far quicker. With regards to capital also, if there are idle assets and if the company is not doing well, there is money locked up in that factory, there is capital locked up in that particular company or LLP. This time bound process which the bankruptcy law provides, this will ensure that there is a quick resolution or a quick liquidation and the capital which is locked up is retrieved and redeployed elsewhere. So, therefore this mechanism, the bankruptcy law will ensure a far more robust and productive use of capital that is available. With regards to the administrative structures that have to be setup, that is already work in progress. Our focus so far has been on having the legislation passed. There was considerable interaction with the joint parliamentary committee. Now the next step is to draft the rules which we are already working on. Then create the structures. Q: By when will the rules be ready? A: One of the structures is the National Company Law Tribunal (NCLT). NCLT is going to be the important authority under the bankruptcy law. Separately the ministry of corporate affairs has taken steps and I would expect the notification in this regard to be issued in a short while. With regards to the administration structures, I would not like to give a timeline because this is a new eco-system that we are creating. This was a vacuum, this was a systemic vacuum, we are now creating a eco-system to fill up that systemic vacuum. Therefore I would not like to get into a timeline thing now. Having said that let me say that this is a top priority and it will be done in a time bound manner and it will be done as early as possible. Q: Let me ask you about the one that has already been in the process of creation, the National Investment and Infrastructure Fund (NIIF). What is going, why the delay in appointing the CEO, when we finally see movement on that front because this has been on for a while now? A: There is no delay the cabinet approved it last year in September or November. I think the cabinet approved it and after that we had to sort of register the NIIF as Alternate Investment Fund (AIF) which has been done, then the various structures have to be created internally we have drawn people from various institutions like the State of Bank of India (SBI) or the India Infrastructure Finance Company Limited (IIFCL) we have drawn personnel as an interim arrangement and there has to be a selection process of the CEO. Q: It’s been underway for a while, that’s why I am asking you why the delay? A: You have to call for application, you have to scrutinise the application. Q: So hasn’t the shortlist drawn up yet? A: No, I would not go into again, I would not like to go into where it is standing at the moment, but the process is in very advanced stage and somebody will be appointed very shortly and let me mention that even with this from Finance Ministry we are in regular dialogue with various sovereign funds, pension funds, superannuation funds from countries of let say in the Middle East, from Southeast, from Europe and from let say with Russia with Rusnano we have already signed a memorandum of understanding (MOU), so there is considerable amount of discussion which has gone on and there are two kinds of interest which are now been shown by the various investors from abroad. Basically, the sovereign wealth funds (SWF) some of them are showing interest in investing directly into the NIIF as a vehicle. Some of them want to invest in individual projects as a co-financier with NIIF. The whole process has been taken forward. Q: So when can we see the first project for instance get investment or co-investment as per the NIIF? A: I think, we should see it in the next couple of quarters we should see. Q: Next couple of quarters. A: Yeah, I am taking a slightly longer time it could happen even in the next quarter. I don’t want to sort of say two months, but it’s on top priority and I would expect this to happen sooner than later, perhaps in the next quarter. Q: Let me also ask you then on IDBI Bank because there seems to be a ceiling that after the government sort of stepped on the accelerator there seems to be now little bit of pullback. Where do things currently stand as far as the government’s plan of the IDBI Bank stake sale is concerned? A: I think there is an outside perception probably the perception outside was that government is now pushing it and the perception outside now seems to be that government is going slow. So far government approach is concerned it has been steady right from the beginning. Q: So you are going ahead with it? A: I am not the final authority to say that we are going ahead with it, but it is a budget announcement and whatever has been announced in the budget action will be taken in line with that. Q: Let me ask you about an other budget announcement and that is the FRBM committee. When can we see the committee being announced, are the terms of reference going to be any different from what was announced by the budget. Will this committee will be supervised by the Reserve Bank of India (RBI) for instance, what can we expect? A: No, the committee will not be supervised by anyone. The committee will be independent. The committee will give its report to government and government will take a decision, so far as the constitution of the committee is concerned it will happen very soon in a matter of days. Q: Terms of reference any different from what was discussed during the budget, course of the budget and also whether the fiscal deficit should be an absolute value. We have this discussion during the budget time as well, what is the thinking on that? A: The budget spelt out basically three things, number one FRBM is under implementation for last 10 years. There have been significant gains both at the central and state levels because of the Fiscal Responsibility and Budget Management (FRBM) Act at the centre and at the state. It also talked about the credit expansion or contraction to be aligned with the fiscal expansion or contraction. It also talked about having a fiscal deficit range. Now these were three broad themes which the budget speech highlighted, but there will be other aspect also which will form part of the terms of reference, other operational aspect about what kind of consultation etc they must have and it will be announced very, very shortly. Q: Let me then ask you about the disinvestment list because again that something that we have been waiting for. You were there when Mr Kant said, that in a month the National Institution for Transforming India Aayog (NITI Aayog) will send the Finance Ministry a list of possible candidates for strategic divestment. You budgeted a significantly aggressive sum in the budget from strategic divestments over Rs 20,000 crore, what can we expect, how soon anything in this financial year? A: You see the disinvestment target of this year will be achieved. Now apart from the disinvestment, we are also focussing on buyback of shares. We did couple of buyback in the month of March we did a buyback of HAL and another companies. So buyback is also another instrumentality especially with regard to cash rich companies with 100 percent government holding or with companies where government has a significant majority. So there are these instrumentalities available and (DIPAM) that’s the new name of the Department of Disinvestment and NITI Aayog they are working together and the process will be taken forward. Q: I know you can’t give me a specific answer on the next question that I am about to ask you as well but given where inflation currently is, do you believe that there is going to be increasingly difficult for a rate cut in June or do you believe that there is still a possibility of a rate cut in June and are you disappointed that we still haven’t seen the full transmission? A: You see with regard to inflation, let me say that normally at this time the inflation numbers have been impacted mainly because of sugar and vegetables. These are two items which have impacted inflation figure having slightly gone up, but still it is within the range which forms part of the monetary policy’s framework. The agreement which has been signed between the Finance Ministry and the RBI, therefore it is within that range and normally in the summer months the vegetable prices tend to go up and this time more so because of consecutive two years of drought. I would expect it to be a temporary factor because overall other aspect of inflation they look quite stable. Pulses also the inflation at the same 34 percent as it was in the previous month and with regard to pulses number of steps have been taken by the government over the last 6 months to increase pulses production to create a buffer stock and all that. Coming to the rates, well RBI will have to announce so I don’t want to sort of speculate on that, but I would say there is a case for transmission of rates. Q: Quick question on foreign direct investment (FDI) and whether we can expect any further changes as far as the FDI regime is concerned and I also believe that perhaps it’s going to be the end as far as the Foreign Investment Promotion Board (FIPB) is concerned, is that what the government is working towards? A: You see the focus of the government is to make everything process driven. The focus of the government is what the prime minister has described as a minimum government and maximum governance and you would see in the FDI policy which was spelt out last November and thereafter in the budget also, the sectoral caps are increased. Large numbers of sectors, more and more sectors are being put on the automatic route. Take the case of the NBFCs for example other than 18 sectors everything required FIPB approval. In the budget we have said that whichever sector there is a regulator and it is being regulated it will be put on the automatic route, so the guidelines for that will be issued very shortly.
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