Real Estate Intelligence Service, Thursday, December 17, 2009

New Companies Bill stresses CSR

New Companies Bill stresses CSR
The Financial Express, December 17, 2009, Page 20

Indronil Roychowdhury, Kolkata

The Companies Bill 2009 has proposed laying guidelines for corporate social responsibility, although it does not intend to infringe the voluntary aspect of CSR, according to a top corporate ministry official.

Minister of corporate affairs Salman Khurseed has said the objective of incorporating CSR in the Companies Bill is to guide India Inc on the way of making money that helps inclusive growth.

Corporate affairs secretary R. Bandopadhyay said CSR is one area in which President Pratibha Patil takes a huge interest. In fact, the Bill seeks to make CSR an integral part of corporate governance and both corporate governance and CSR would come under the Act.

Besides the normal process of taking the President of India’s consent following a Cabinet nod for transforming a Bill to an Act, the 31-member parliamentary committee looking into the issue of corporate law would shortly present the CSR guidelines before the President, Bandopadhyay said.

The guidelines would allow India Inc to take voluntary initiatives, too. However, principles would be laid so that it becomes mandatory for India Inc to mitigate with the climate change issues, Bandopadhyay said.

While oil behemoth ONGC Ltd has already framed a climate change policy, coal behemoth Coal India Ltd (CIL) is debating the issue. According to CIL chairman Partha. S Bhattacharyya, though CIL is not a carbon emitting company, it ensures that after a mine’s life is over, both open cast and underground land reclamation is properly done to ensure environmental protection.

CIL has engaged Central Mine Planning & Design Institute (CMPDI) and National Remote Sensing Agency (NRSA) for satellite surveillance, which would bring 172 open cast mines under its ambit within the next three years, Bhattacharyya said.

“We are trying to frame a system of corporate governance in terms of people, planet and profit. Our emphasis is now on a triple bottom line wherein the first priority would be people, second planet and profit the last,” Khursid said.

“We want to present a model of CSR currently unknown to the rest of the world,” he added.

According to ITC Group vice-president Nazeeb Arif, although the company has been long propagating triple bottom line, it has not talked of making CSR statutory. “But if CSR has to reach a meaningful dimension, there should be a mechanism of rating companies based on triple bottom line, which also needs to be given incentives,” Arif said.

“Statute should provide for a rating system, understandable to consumers. Consumers should drive companies to make social investments,” Arif said.

However, the Bill is still open for comments of all stakeholders, said Bandopadhyay. “Our final guideline will come only when we are able to converge all diverse opinions to a consensus,” he said.

A Tata official said even as there are no statutory CSR guidelines as yet, 66% of the profits generated by the Tata Sons goes back to the society through various trustees.

States for higher GST, April rollout in doubt

States for higher GST, April rollout in doubt
The Economic Times, December 17, 2009, Page 9

STATE FMs’ PANEL SEEKS 15% PLUS RATE ON FEAR OF REVENUE LOSS

Our Bureau NEW DELHI

STATES are demanding a goods & services tax (GST) rate higher than what an internal task force of the Finance Commission has suggested, worsening doubts on whether the key indirect tax reform of the Manmohan Singh government would roll out as per schedule on April 1, 2010.

The states are seeking 15%, or more, compared with the 12% rate suggested by the task force of the commission, which decides the formula for allocation of revenues between the Centre and state governments.

“States want the GST rate to be pegged at 15% plus... The empowered committee has written to the Thirteenth Finance Commission,” Bihar finance minister Sushil Modi said.

GST is a single levy, though it could have state and central components, that would replace the plethora of indirect taxes. These levies include excise duty, service tax, additional Customs duty, surcharges at the Centre and value-added tax and local taxes such as entertainment, luxury, entry tax at the state level. It is in the nature of a consumption tax, which seeks to create a seamless pan-India market with both manufacturers and service providers having the right to offset state taxes paid on inputs sourced from another state.

States are demanding a higher rate as they fear loss of revenue once the GST is rolled out as the revenue-neutral rate agreed may not impact the aggregate collections, but at the individual state level there could be gainers and losers.

The compensation, which will be over and above the sharing of revenues recommended by the finance commission, would cover such losses. If the suggestion finds favour with states, the GST rate could be pegged at around 15-16%, which will include both the central and state components.

The empowered committee’s draft paper on GST has pitched for a dual GST structure—one rate for states and one rate for the Centre. Besides, there would be two slabs—one floor rate for essential items and one standard rate for general items, a special rate for precious metals such as gold, platinum and an exempted list of items.

The 15-16% rate would be the standard rate applicable on non-essential items and is in line with the internal projections made by the central government and state government officials working on the GST framework, a government official, privy to the deliberations, said.

A single GST rate has been proposed for services without slabs, said West Bengal finance minister Asim Dasgupta. He declined to give details of the proposed rate structure.

The empowered committee will meet finance minister Pranab Mukherjee on January 7 to sort out the issues related to constitutional and administrative changes related to the implementation of GST.

“After our meeting with him (finance minister), we would be able to take a decision on constitutional amendment and other preparations,” panel chairman and West Bengal finance minister Asim Dasgupta said, adding it may be difficult to introduce the bill in the ongoing winter session.

RATE OF INTEREST

Thirteenth Finance Commission will decide the formula for sharing revenues between Centre and states, and among states

States have demanded compensation for any loss incurred due to shift to GST

The commission, therefore, needs to know the GST framework

A task force of the commission has suggested a revenue-neutral GST rate of 12%-rate at which there will be no revenue loss at aggregate level

States have sought from the commission a rate of 15%-plus. This will increase their compensation

The finance commission will submit its report by December 31, 2009

Urban min wants ‘priority’ only for small home loans

Urban min wants ‘priority’ only for small home loans
The Economic Times, December 17, 2009, Page 9

Amiti Sen & Anto Antony NEW DELHI

THE urban development ministry has proposed that priority sector status for housing loans should be limited to amounts up to Rs 5 lakh to encourage banks to support low-cost housing, but the idea may not find favour with the lenders.

“Although the scheme provides for subsidised funding for housing for the poor, it would be successful only if banks are made to disburse loans to the economically weaker sections,” said a government official who asked not to be named.

Currently, loans up to Rs 20 lakh qualify as priority sector lending. Banks are required to earmark a certain percentage of their funds to some identified sectors, which would otherwise find it difficult to access funds. Such sectors get loans at discounted rates.

In a submission made to the Planning Commission as part of the mid-term appraisal process for the on-going Eleventh Five-Year Plan, the urban development ministry pointed out that an “enabling environment” has to be created for successful implementation of the government’s vision of slum-free cities through its flagship scheme Rajiv Awas Yojana.

It has also suggested that mass affordable housing should be declared as infrastructure to reduce the cost of funds.

The ministry is apprehensive that the current Rs 20-lakh ceiling reduces fund flow to the economically weaker sections, as banks are often fearful of smaller loans that they may be asked to waive off. Moreover, it is also difficult to forfeit mortgage of the poor and the cost of collection is high.

The proposal is, however, likely to be contested by banks, which will need to disburse a greater number of loans to meet their priority sector targets. When the limit for priority sector lending is as high as Rs 20 lakh, banks get away by avoiding requests for smaller loans. They get to meet their priority sector target by sanctioning a smaller number of bigger loans.

“If banks are asked to bring down the ticket size of housing loans to Rs 5 lakh, many of us will not be able to meet the priority sector lending targets without a spike in non-performing assets,” said the head of a new-age private sector bank.

Existing guidelines mandate that at least 40% of net bank loans be earmarked for certain designated sectors, which include exports, housing, rural and agriculture sectors. At least 18% of the net bank credit should be earmarked for agriculture. For foreign banks, the priority sector lending target has been fixed at 32%.

Three out of 27 PSU banks and five out of 22 private sector banks in the country missed the priority sector lending targets. More than half of the banks couldn’t meet the subtargets for agriculture and weaker sections.

Direct Taxes Code will take in stakeholders' inputs

Direct Taxes Code will take in stakeholders' inputs
The Hindu Business Line, December 17, 2009, Page 15

Our Bureau, New Delhi

The Government will take inputs from various stakeholders before giving final shape to the proposed Direct Taxes Code.

This assurance was given by the Union Finance Minister, Mr Pranab Mukherjee, while addressing the second meeting of the Parliamentary Consultative committee attached to the Finance Ministry. It was the second meeting on the issue of the Direct Taxes Code.
Main issues

The main issues raised on the DTC include minimum alternative tax on gross assets, provisions relating to taxation of foreign companies, residential status of foreign companies—their control and management, General Anti-Avoidance Rule, taxation of charitable organisations, shift from EEE to EET method of taxation of savings, capital gains taxation and deduction of interest on housing loan, etc.

Mr Mukherjee assured the members that these identified issues were under deliberation and a considered view would be taken on them in the coming days. The Finance Minister noted that the suggestions and concerns raised by the members of the consultative committee were of great importance and would help shape out a tax policy that could meet the aspiration and expectations of the younger generation and also of the globalised corporate sector.

The meeting was attended by Mr Shantaram Naik, Mr Rahul Bajaj, Mr Rajeev Chandrasekhar, Mr Sabir Ali, Mr Mukut Mithi, Mr N. K. Singh, and Dr E. M. Sudarsana Natchiappan - members of Rajya Sabha.

Mr Partap Singh Bajwa, Mr Mukesh B. Gadhvi, Mr Suresh C. Angadi, Mr T R Baalu, Mr M. S. Reddy, Mr Neeraj Shekhar and Ms Rajkumari Ratna Singh – members of Lok Sabha attended the meeting.

Direct taxes code to give India an edge: FM

Direct taxes code to give India an edge: FM
Business Standard, December 17, 2009, Page 5

BS Reporter / New Delhi

Finance Minister Pranab Mukherjee today said the proposed Direct Taxes Code would give an edge to the country while dealing with international taxation issues.

The code has a provision for advance pricing agreement (APA), which has been proposed to bring certainty and stability in taxation of cross-border transactions.

The Dispute Resolution Panel (DRP), already introduced with effect from October 1 for disputes relating to transfer pricing along with APA, would provide a fiscal environment conducive for foreign investments in India, Mukherjee said at a meeting of the Parliamentary Consultative Committee.

Trade and industry bodies have been demanding an alternative dispute resolution for transfer pricing issues for quite some time. “I am sure these new initiatives, already taken and proposed in the Direct Taxes Code, will check avoidable litigation with resident as well as non-resident tax payers,” added the minister.

The finance minister emphasised that the Code should not be compared with the Income-tax Act of 1961, as the attempt was to move forward on the basis of a broader tax base, moderate tax rates, effective implementation strategy and better delivery of services to the tax payers.

This was the second meeting on the issue of the Direct Taxes Code.

DLF eyes better cash flow after merging asset arm

DLF eyes better cash flow after merging asset arm
Hindustan Times, December 17, 2009, Page 25

HT Correspondent, New Delhi

Realty major DLF has kicked in the corporate restructuring plan. Its board of directors has approved the integration of promoter held company Caraf Builders & Constructions with DLF Cyber City Developers—a subsidiary company of DLF. Caraf Builders is the holding company for DAL (DLF Assets Ltd), which buys out commercial property from DLF and in turn leases them out.

DLF’s board had constituted a special committee of independent directors to examine the possibility of integration of rental business held both by the company and its promoters. The integration of rental business is aimed to eliminate conflicts of interest and achieve management integration, the company said in a filing to the Bombay Stock Exchange.

Post-merger the promoters, which include KP Singh and his family members, will hold 40 per cent in Caraf Builders while the remaining 60 per cent would be owned by DLF. The company did not assign any value to the deal that has been termed as ‘cashless transaction’.

The in-principle approval by the DLF’s board is subject to necessary corporate and regulatory approvals to be implemented in due course of time. Kotak Mahindra Capital and Enam Securities were the transaction advisors and independent valuers to the special committee. BMR & Associates and KPMG were the tax advisors.

The realtor said that consolidation of the groups’ rental assets under the holding company, DLF, would enhance stable rental incomes and cash flows. “It would also eliminate the perceived conflict of interest between the promoters & DLF and will facilitate management integration,” the company said.

“The merger is expected to pave way for listing of DAL at the Singapore Stock Exchange during the next financial year,” a senior DLF executive said on conditions of anonymity. He, however, refused to provide details of the extent of stake dilution in DAL.

DLF investors to gain from Caraf, Cybercity integration

DLF investors to gain from Caraf, Cybercity integration
The Financial Express, December 17, 2009, Page 6

Rajat Guha, New Delhi

Shareholders of the country’s largest realtor DLF would eventually stand to gain as the integration of Caraf Builders, a 100% promoter-owned company and DLF-owned DLF Cybercity would immediately add to its earning per share. The integration between the two entities is set to be completed by January-end.

However, DLF’s gross debt would eventually increase by Rs 2,300 crore, Rs 1,600 from DAL and Rs 700 crore from Caraf Builders would be consolidated on to DLF’s balance sheet. Caraf Builders is the holding company of DAL, which buys commercial assets from DLF and lets them out on rent.

The DLF board on Tuesday evening approved to integrate, including by way of merger/amalgamation of DLF Cyber City Developers with Caraf Builders & Constructions, the holding company of DLF Assets (DAL), set up by group promoter KP Singh. “The debt that would be transferred is a self funding one as it was raised through lease rental discounting. So a portion of the DAL’s lease income would be automatically used to pay off the debt and that the rest would come to DLF by a ratio of 60% economic interest in the merged entity,” Saurabh Chawla, executive director finance at DLF Group said.

DLF has already sold off Rs 10,500 crore worth of rent yielding properties to DAL and has received Rs 7,800 crore, of which DAL has paid Rs 2,800 crore as advance to DLF. The rest Rs 2,700 crore is due in the next three years and so there is no immediate burden on DLF’s books.

Chawla added that the finer contours of the merger would be deliberated over the next few days and would include the exact ratio in which DLF Cyber City and DAL would exchange shares.

The valuation ratio accepts the relative valuation of Cyber City and Caraf in the ratio of 60:40. Consequently, the company would have an economic interest in the integrated entity of 60% with the residual 40% being held by the Caraf shareholders.

The DLF promoters had invested in DAL through Caraf and DAL was set up to buy commercial properties of DLF. Consolidation would help the group's rental assets under DLF to further enhance the stable rental income and cash flows of the company.

The DLF-DAL integration has also set the ground for lisiting DAL as real estate investment trust in Singapore exchange, which is likely in May 2010.

Last week, KP Singh and family had bought the shares owned by DE Shaw, a leading hedge fund, for $470 million in DAL. The hedge fund had invested $400 million in 2006.

DLF Cyber City is the largest subsidiary of DLF that contributes a quarter of the group’s net profit and a fifth of its revenues. For the financial year ended March, DLF Cybercity reported a net profit of Rs 1,102 crore on revenues of Rs 1,442 crore, a net profit margin of 76%.

Infra projects under PPP model to face CAG audit

Infra projects under PPP model to face CAG audit
The Financial Express, December 17, 2009, Page 3

Surabhi, New Delhi

Just a year after India’s largest corporate accounting fraud at Satyam Computers and Maytas Infra that eventually derailed the Rs 12,500 crore Hyderabad Metro Rail project, the Comptroller and Auditor General (CAG) of India has decided to audit infrastructure projects executed through the public private partnership (PPP) mode. The CAG will not only audit the books of account of the special purpose vehicles (SPVs) and joint venture companies executing the PPP projects, but more importantly, those of the private player as well.

The rationale is to ensure that all stakeholders get ‘value for money.’ The CAG of India Vinod Rai has said the guidelines will ‘help auditors in determining whether government and other public authorities have got the best possible deal.’ More importantly, with the private sector expected to pitch in about 30% of the $ 494-billion investments in infrastructure though the PPP route, the Planning Commission and the finance ministry have been keen to ensure that such projects do not get disrupted because of any discrepancies by the private player.

Overriding concerns of commercial confidentiality of private players, the new guidelines enable the CAG to audit all accounts, documents, bills and records relating to financial closure, design, construction and oversight maintenance. It will also scrutinise documents about the operation and maintenance of the assets including the revenue sharing arrangements and escrow accounts; quality and standards of service and end of project operations such as value of residual assets would be audited by it.

The reports of independent auditors and independent engineers as well as the minutes of the board meeting of the SPV and the agenda papers will also be examined by the CAG.

If the need arises, they can also look into books of accounts of the private company. As per its new audit guidelines, government auditors can obtain additional information from the private player forming an SPV under Regulation 169 of the CAG’s Regulations on Audit and Accounts 2007. For joint ventures, sanction by the President or Governor under Section 20 of the CAG’s Duties, Powers and Conditions of Service Act, 1971 would be required to obtain additional data.

Significantly, the new rules also enable the CAG to check whether there is a need to re-adjust the contract period if the rate of return for the project is higher than projected and also the economy of the cost of operations and whether there has been any ‘padding’ of costs.

However companies are cautious in their response. “It is a step in the right direction. But the government needs to ensure that the auditing exercise does not become a hurdle for the concessionaire,” said M Murali, director general, National Highways Builders Federation.

“It is a welcome move and issues of financial closure and bidding need to be scrutinised often. But will the CAG be able to assess the technical side of the project. Also most SPVs outsource the construction work. So how can they be held responsible for any errors on the part of the sub contractor,” an official with Gammon Infrastructure Projects Ltd said.

The country’s supreme auditor will also examine the books of the public sector partner, including data and records justifying the use of the PPP route for a project, the bid documents, the selection process and concession agreements would be a part of the audit.

PPP projects have been defined as those involving any participation from the private sector. They would be selected for audit by the CAG based on risk considerations, such as the shareholding pattern, government guarantees, nature and value of the concession and the nature of the service to be provided.

The CAG's move to enumerate clear guidelines for auditing PPP projects comes at a critical time. The Centre's statutory auditor has just begun an audit on the D6 gas exploration block in the Krishna-Godavari basin licensed to Mukesh Ambani-run Reliance Industries Ltd, for two financial years starting 2006-07. The CAG is auditing the block with respect to the Production Sharing Contract signed by the RIL-led consortium with the Centre.

The CAG has already audited a few infrastructure PPP projects, including the Delhi Metro Rail Corporation (DMRC) and the Delhi-Gurgaon Expressway, but these were largely based on the guidelines issued by the International Organization of Supreme Audit Institutions. In cases like the DMRC, the CAG had to assert its mandate repeatedly before the corporation agreed to an audit.

Centre, Plan panel differ over Rajiv Awas Yojana funding

Centre, Plan panel differ over Rajiv Awas Yojana funding
The Financial Express, December 17, 2009, Page 20

Kakoly Chatterjee, New Delhi

The housing ministry has worked out the cost of its flagship programme to make India slumfree—Rajiv Awas Yojana (RAY)—at Rs 9,00,000 crore over a period of 10 years. However, the Centre and the Planning Commission currently differ over the funding that the Centre should provide.

While the ministry wants the Centre to contribute Rs 1,50,000 crore, the Planning Commission wants the amount to be lower. The Planning Commission wants states and private parties’ contribution to increase further and reduce the Centre’s contribution.

The housing ministry, however, feels that the Centre would need to make substantial contribution to spur investment from the states and private partners for RAY. “If there is not enough funding from the Centre then neither the private sector nor the state will be motivated to invest in the project,” an official from the housing ministry explained.

In metros and tier I cities it is easier to attract investments from private developers as real estate is a rare and expensive commodity. After providing for dwelling units to the slum dwellers at nominal costs the private developers in the bigger cities can develop residential and commercial complexes where they can earn profits.

But in case of smaller towns cross subsidisation may not work because it may not be as profitable to develop commercial and residential spaces. In smaller cities where developing real estate is not such a profitable proposition for private developers, they will not show any interest unless the government makes it attractive for them by pumping in a considerable amount.

The state governments are also contributing majorly for this slum clearing project as they are giving property rights to the slum dwellers because land is a state subject. In the absence of major incentive from the Centre, the housing ministry fears that this project may not take off.

In order to make the slum free India scheme successful the states will also relax floor space index wherever possible. The Centre will not only give capital subsidy but also interest subsidy for RAY projects.

In order to make RAY more workable the Centre would provide viability gap funding of up to 40%. While in most cases it is expected to be in situ development if the private developer comes with the parcel of land the centre will develop the infrastructure.

The Centre wants the states to release more land for affordable housing and modify town plan layout so that it caters to the need of the weaker section as well.