India is an outlier, but for a good principle: Jayant Sinha

There are numerous positions vacant in the tribunals. Sinha admits there is a challenge."We have to put our shoulder to the wheel and deliver on this as soon as possible."

Below is the verbatim transcript of Jayant Sinha’s interview with Latha Venkatesh on CNBC-TV18.Q: The general anti avoidance rules (GAAR) which will kick off April 2017, make it very clear that derivatives won’t be taxed but the cash leg, it is always sell cash, buy futures, or buy cash, sell futures; that cash leg tends to get taxed capital gains. That will make nonsense of the entire derivative trade. So have you applied your mind to that, will these kinds of trades be excused from capital gains?A: You might want to just take a step back, the reality is that all across the world whether it is the Group of Twenty (G20), Organisation for Economic Co-operation and Development (OECD), the United Nations (UN), everybody is trying to get to a much more efficient and effective tax regime.The whole idea of GAAR is to be able to look through certain arrangements which have been done and setup primarily to avoid paying taxes. We can’t have a world where people are not paying taxes, so, everybody has to pay their fair share of taxes. So, if there are constructs that are setup without necessarily a legitimate commercial purpose but simply to avoid paying taxes in jurisdictions then of course we have to ensure that we close those loop holes and that is what GAAR is intended to do.As we bring in GAAR, and of course because of the unique nature of course – you know I have been an investor in India also and used many of these provisions myself, so, we have to be very careful that as we introduce this new regime that it is done in a way that is a) predictable and b) not too difficult from a compliance point of view.So, that is why we have said we are going to be able to grandfather it, we are going to provide a time for the transition to work out and during this time while the transition is being worked out, we are doing intensive consultations with all stakeholders so we can work through these exact details as to how one leg is going to be taxed and the other leg is going to be taxed. So, we are in the process of collecting a number of such situations from various stakeholders and then we will as the Revenue Secretary has said, publish them, make them available for everybody and refine them as we go along.Q: As you say you have been an investor globally and in India and in every place or in most places, except perhaps Argentina, the foreign investor is not taxed in the destination country. He gets income which he takes back home and he is taxed as income tax in the host country, in the country of his residence. Now, if we start taxing long-term or short-term, investors who come into India, we are kind of standing out from the crowd which maybe negative for us?A: You bring up a very interesting point and this actually is a very serious matter of how taxation works across the world. I myself have been in a series of important discussions at the UN levels, at the G20 level where we are thinking about the way taxes work around the world. You can either tax at source or tax at destination which is what you are saying. Right now by and large the taxation has largely been at destination rather than at source.We in India have generally tended to follow the taxation at source principle because if we don’t follow that then what is going to happen is that everybody is going to setup offshore entities, all assets in India are going to be owned offshore and there will be no capital gains for example that we can ever have. This is a problem of indirect transfer that the G20 and the OECD are discussing.There is also global inequity that is caused because of this because if you see what happens is, that if all the assets are held in the OECD, the north countries, there are no assets that are held in the south countries, then a lot of tax revenue leaves the countries in the south and goes to the countries in the north because that is where the assets are. If you tax assets only at destination, not at source and most of the assets are in the north then the taxes will only be in the north and there will be too few taxes in the south. Now, of course India is one of the very few countries that has the ability to say the current regime that we have right now is inherently inequitable if you set it up between destination and source that way.Essentially if we continue with this regime, you are going to end up in a situation where all assets in the south are going to be held in the north and all the tax revenue will be there as well. So, this is a very serious matter as I said that is being discussed at the OECD, G20, UN level because we have to move to a more equitable tax regime globally. These are all aspects of that and as I said we are going to move towards -- people recognise the situation and they recognise that this is where it is headed, it is not just India, the United Kingdom, the US, everybody us thinking about how to deal with these kinds of issues.So, in that sense we are an outlier but we are an outlier for a very good principle and we are protecting the interest of the Indian public and Indian tax payers which I am sure all of your viewers will appreciate.  Q: I would be very happy if the government gets more money, no two ways about that but being an outlier can also mean that we will scare away investors; that is my big worry. Do we have that much of a punch that we can be such outliers that we will tax and others don’t tax for it and also we have Securities Transaction Tax (STT), so in a way it is not as if we are not taxing?A: I agree with you and that is precisely why we are saying that we have to enter into these discussions. We have to understand what is the right way in a revenue neutral way or in a revenue enhancing way to move forward, how do we ensure that we are not just an outlier, how do we get the support of the global community for a more equitable tax regime, these are all matters that are in play right now and they have to be sorted out. Hopefully everybody will appreciate that this is being done in the national interest, it is being done so that we protect not just India’s interest but the interest of other countries in the south also and so we are working through all that.Q: The Bankruptcy Law has been passed and that is very good news for the country as a whole and its macros but how soon will it be implemented, when can we get the first set of tribunals appointed and the first set of insolvency professionals registered?A: Within the next 12 months, we want the bankruptcy system to be operating. The bankruptcy system will be effective if we are able to move two or three situations through the bankruptcy process and demonstrate that it works, that the insolvency process is effective, that we can do things in a timely fashion, that there is an efficient and effective recovery and whether it is work men or creditors get what is owed to them. So, we have to really make sure that we can demonstrate through two or three cases.I have done a lot of work in the United States in special situations, distressed investing, yes, of course we go through bankruptcy processes there but it is actually the threat of bankruptcy that is in some way far more important that bankruptcy itself. So, the point of getting the bankruptcy system established in India is, if we can run through two or three cases in that fashion then the fear of hanging, concentrates the mind wonderfully and so the fear of bankruptcy will enable us to do a lot of preemptive work because creditor rights are going to be so significantly strengthened as result of that. So, we have to absolutely get it to work for two or three cases but I think the far more salutary effect of bankruptcy is going to be when we know that it is going to be possible to invoke it.Q: If you can give me a timeline. Will the first National Company Law Tribunal (NCLT) take up a case in six months, in three months, what is the timeline you are looking at?A: We have to build capacity as we go along and so we have said and I have said in parliament as well that we think that the implementation process will be staged. As we have the capacity in place, obviously we will notify it and make it law. So, that is how we are thinking about it. However, our sense is, over the next 12 months, we will have a functioning bankruptcy system.Q: I will tell you where my scepticism comes for. I was around as a cub reporter in 1993 when the Debt Recovery Tribunal Act was passed and the debt recovery tribunals (DRT) were set up, I was around in 2002-2003 when the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) was passed and definitely in 2003 since I was in a more editorial position I went to town saying that banks will be able to recover assets quickly. Nothing much happened and I can tell you as we speak, four debt recovery appellate tribunal seats are lying vacant, not appointed. 40,000 cases lying in front of DRTs, will that be the fate of NCLTs?A: We are strengthening capacity in the DRTs, there is a DRT-SARFAESI Amendment Bill that has already been tabled; hopefully we will pass it in the monsoon session. There are certainly some deficiencies as far as DRT and SARFAESI are concerned and we have to address those. We will see some of that in the NCLT also when it gets setup. So, we can have different types of people appointed on the NCLT so we will have to see, the challenge in everything in India and you can bring this up on almost any issue you want is execution.Q: Let me come to the capitalisation of banks. As of December 31, one was prepared for 5-6 percent gross NPAs from the public sector banks but now it is definitely 10 percent. Don't you have to rework your capital numbers, will Rs 25000 crore suffice, would you not have to set aside more money?A: We have worked through the numbers very carefully. I myself have run the spreadsheets on this. So, I have gone through the numbers very carefully. Obviously we have been working very closely with RBI. We need to really understand what the system wide asset quality situation is and we need to do the stress test.In fact when I was on the standing committee on finance before I became minster of state, we had already discussed at that time through a number of meetings that we needed to stress test our banking system which is precisely what we did with the RBI starting from about August 2015. When RBI finished all of that we had a very good sense across the top accounts, to 200-300 accounts what the system wide stressed assets number were, what the gross NPAs were. So, none of this is a surprise to us. Trust us we are working through the numbers, we know exactly where the banks are  with respect to their NPAs, what their capital requirements are and where they are in terms of their capital adequacy norms and those discussions are ongoing.The other thing which people lose sight of but you have to remember that we have also now begun the third phase post the asset quality review which is the consolidation phase and you saw that starting yesterday. Through the consolidation phase, through the cost rationalisation and so on we will be able to further strengthen the capital base of our banks as well.Q: Just a word more on capitalisation. I did the numbers along with all the analyst reports that were helping me. It was about Rs 2 lakh crore that people were expecting up over the next 4 years in terms of capital assuming 13-14 percent credit growth, but if the banks were to grow at 8-9 percent which is the current loan growth then you need far lesser capital?A: I am spreadsheet jockeying. I can run spreadsheets with the best of the analysts, okay. Let me tell you when we did Indradhanush we said that the number was Rs 1.8 lakh crore assuming system wide credit growth of 12 percent, that’s what we had said then and on that Rs 1.8 lakh crore of which we said government would provide Rs 70,000 crore, 25:25:20 and then we would expect to be able to raise from the market Rs 1.1 lakh crore, those were the numbers we had put out in August 2015. Now obviously depending on what you assume for credit growth you can assume more numbers, less numbers, gross NPAs, worse case.Q: But you are okay with the lower credit growth is all I am asking?A: No, it’s not a question of we are okay or not okay. It’s really a question of what is required in the market place right now. As of right now, what we are seeing the market place is fairly robust credit growth when it comes to retail and small and medium businesses to an extent for working capital, but for a variety of very good reasons project finance is not growing as much as it should and therefore credit growth is not at the levels it has been and the credit growth levels we are seeing is perfectly consistent with what you would expect within economy where there is not a lot of project finance happening.Q: What’s the map should we be able to see some consolidation of the non-SBI group in FY17 itself?A: Well, again as far as consolidation is concerned you have to really ask yourself what the objective is. We really need in India along with our very excellent private sector banks, we need a few global scale banks in India which are really large and capable of providing the most sophisticated financial services as well as the best technologies, so we need a few of those banks and then as there are around the world we need differentiated financial institution.Q: May I interrupt I know this like the back of my hand because I heard you on this issue and I have heard even the Finance Minister on this issue. My point is assume I am a Bank of Baroda investor that is best in class in the non-SBI category in public sector banks that investor is worried that will you tie me up with an IOB, will you tie me up with United Bank?A: All investors in public sector bank should be very reassure. With respect to the question of consolidation, are these consolidations going to be as they call them “shotgun marriages” where you just force people together absolutely not. We have said that the goal is competitiveness. If you are going to get into a “shotgun marriage” where there is no synergy, where there is no complementarity and where there is no value creation why would you want to do the merger. In any case we are the primary shareholder, but it has to be a process that has to be driven by the boards. The boards have to look at what the strategies for their various banks are, which strategy is going to create value whether it is a consolidation strategy or a differentiation strategy and then accordingly choose strategies that are going to create value for all stakeholders. I have been in business for a long time. I know what it means to do value creating consolidations and mergers I have done many of them myself so you can rest assured that we will do what is in the best interest of all stakeholder.Q: When is the monetary policy committee (MPC) members likely to be announced?A: A selection committee is being constituted for that and as soon as the selection committee is constituted for it, they will of course go through and select the three government nominees for that.Q: We should know that in a month?A: I can’t give a timeline on that because the selection committee has not yet been constituted, as soon as that’s constituted they work through their calendars, they get nominations. You see part of what has to happen and this is the reason why of course the National Investment Fund (NIF) selection has taken time, it’s because these are very important appointments first of all.Second of all, we want to make sure that we give a fair opportunity to everybody around the world for these every important positions. So in NIF obviously we invited, we then advertise around the world we got a very good slate of candidates and that whole process are working through that and I can tell you in the private sector also that if you have to do a CEO search it can take 6-8 months. In the same way, yes the selection committee will be constituted very soon, but of course we will advertise globally for that we will want world class eminent experts on that, so that process may take some time.Q: So selection committee should be at least appointed in a month?A: Yes, that can be done very quickly.Q: NIF actually its 2 years since you announce the constitution of that fund.A: No that’s not right we have announced NIF in the budget last year, so it was in February 2015 that’s we did that and of course a lot has happened as far as NIF is concerned.Q: You said that in end Jan, you said that in early Feb to Shereen?A: No, I said that we have already got a very, very good group of candidates, then of course we had to go through the interview process, we had to go through getting approvals and so on and so now we have almost announcing the final candidate who is going to be the head of NIF, but in the meanwhile there is lot of other work that’s also been happening because of course we have been in discussions with investors so there are 2 or 3 funds that are going to get started relatively soon.Q: There will be stressed assets funds.A: There will be a stressed assets fund, there will be a green field assets fund, there will be a renewable fund all of those are move in. There will be also one on manufacturing, so all of those are moving along very quickly.Q: What’s the size of stressed assets fund?A: No, the stressed assets fund, we are hoping that we will do a first close of Rs 10,000 crore and then once you have done a first close of Rs 10,000, we will then do second close and really try and build that up, but I think the stressed asset fund is going to be very important, very important as we deal with the NPA issue.Q: Connected to that government was looking at a panel which will be kind of vetting the stressed assets sale by banks? Exactly what will be the role of that panel?A: It is under consideration right now and we have to separate out process integrity from the commercial decision making. So what we think the panel can do is to actually ensure process integrity. It’s a transparent process with all the necessary analytics and everything else, so we can ensure the integrity of that, but the commercial decision obviously is the domain the prerogative of the bankers themselves, which they routinely do in any case and so they should continue to make the commercial decision.Q: So when does this panel come up?A: It’s all imminent we are just in the process of working through all of that.Q: Within a week or so we should.A: We should very shortly._PAGEBREAK_Q: I have a philosophical problem with all this. I thought where the bank boards bureau was set up and when the PJ Nayak recommendations came in you will actually strengthen the boards of the individual banks. If the boards of the individual banks stood and said I think that this stressed asset sale has gone through the process isn\\'t that a better process. Now the way you were going the bank board bureau appoints everybody, another panel will vet the process. Then why do we have boards for banks, they have no power to do anything?A: That is as always an over dramatisation which you all love to do in the media. That is not correct. As I said earlier the boards play a very important role and will continue to play an extraordinarily important role. The governance is crucial to the functioning of these bank. As I said our first step was to actually strengthen the governance and management. Commercial decision making for the boards will of course be done for these situations be done by the board but because this was an unprecedented situation the level of haircuts that have to be done for these assets, the speed at which they have to be done is unprecedented and for that we want to make sure that from a process point of view, the manner in which this was done everybody comes out of it feeling comfortable that yes, this is a validated process, it is a process that is not going to run afoul of the CVC, CAG etc. It is public money after all. So, we just want to make sure that is validated because of the speed and the scale at which we are doing it. Obviously the commercial decision making has to stay with the boards.Q: Primarily because of this extraordinarily stressed assets situation that we are in I have a complaint with the finance ministry. You are the maai-baap for the public sector banks, so to speak. You are their shareholder or the government representative of the shareholder. Now, you look at the way UDAY scheme has panned out. 75 percent of the loans owed by the discoms becomes state government loans, very good. As a shareholder you should be very happy with that process because a stronger owner is taking charge. But for the remaining 25 percent they are marked as NPAs because they are re-structuring. They should logically marked as NPAs. When I read the UDAY press release it says that that 25 percent should be converted into discom bonds at an interest rate equal to the base rate. Now this is not fair. It should be market rate and the market will not give at 9.3 percent. The market will give at probably yield of 11-12 percent because they are basically entities whose expenditure is higher than their income. Is it not unfair that somebody sets the price of the yield of that bond, why is that not market discovered and you are not even coming to the rescue of public sector banks?A: Of course we are backstopping the entire system. So, whether it is the discoms which are also obviously owned by the state governments or the public sector banks ultimately the debt of all of these entities is backstopped by the Government of India by the sovereign.Q: The discom bonds will be guaranteed by you?A: No, I am not saying necessarily the discom bonds but to the extent that the discoms themselves are owned by the state government and you know that issuance of any state debt by the constitution ultimately has to be validated and endorsed by the federal government and central government as well and therefore in all of this obviously we have to make tradeoffs across all these different entities where all these are ultimately backstopped by the central government and this reflects some of the tradeoffs that we have to make.Q: They have to set aside provisioning for - I mean every bank announces in its notes to accounts that this much is for the discom bonds and they have had to provide for it. The Punjab state-FCI tussle, again they have had to provide for it. To say that all this is sovereign debt and ultimately it is backstopped doesn't really solve the problem for the banks. National Agricultural Cooperative Marketing Federation of India Ltd (NAFED), government owned is a wilful defaulter for Punjab National Bank. It doesn't solve PNBs problem when you say, ultimately it is government organisation. You are not making life easier for the PSU banks inspire of the fact that you are the mother ministry for them?A: No, you have jumped to a conclusion where you have said that they are a wilful defaulter.Q: No, it was declared in the PNB list. I am just quoting fact.A: They have obviously an NPA issue there and that is being sorted out as well. But ultimately you have to recognise that as far as government is concerned government has to make sure that all the different entities are viable and sustainable and in that sense we have to backstop not just the public sector banks, we have to in some ways backstop the state governments and we have to backstop all of the government entities like FCI and discoms as well. Therefore it means it really is up to the taxpayers to do all of that. So, in doing so, in ensuring that the entire system and looking at it at a systemic level is working properly we have to of course make certain tradeoffs.Q: Several charges were made against the RBI governor yesterday by a member of your party. Do you endorse them, agree with them?A: This is a democracy and in a democracy many people express many views.Q: A leader of your party, it is not anybody. One would look at him as a spokesman of your party. Is that the voice of the party speaking?A: There are in a democracy many views and many perspectives and I think we should be willing to listen to all perspectives when it comes to these matters. There are many voices that have expressed great deal of support for the policies followed by the Reserve Bank of India (RBI). There are other voices that are critical of some of those policies as you have been of the ministry of finance right now. So, in a democracy we have various shades of opinion and various perspectives and views and that is very healthy for a democracy.Q: I am not sure whether such kind of name calling is healthy at all and the government not even distancing itself from those comments, should we take them as official government comments?A: My understanding is this was a comment made by a Rajya Sabha member. Rajya Sabha members are not necessarily members of the government.Q: What are the chances that the governor will be continued? We did a poll of bond dealers, economists, CFOs, bankers and it was 100 out of 100 asking for his continuation. Is there a chance he will be continued?A: These are not issues that are discussed in the media. We have a very mature collaborative institutional relationship with the RBI and we look forward to strengthening and building on that relationship.Q: When do we get to know at least the decision of the government?A: These are not issues that are discussed in the media.Q: Tell me the timeline, I am not asking you who?A: These are issues that are not discussed in the media. You will know soon enough at the appropriate time.