FIIs trim their holdings in 12 private banks in second quarter of FY20

Foreign institutional investors (FIIs) have trimmed their holdings in 12 private banks in the September quarter amid concerns over a build-up of stress in mid-sized companies and small and medium enterprises (SMEs).
Within the BSE-500 universe, mid-sized private banks are the ones to see deeper cuts in FII stakes. For instance, Karnataka Bank saw its FII stake reduced by 167 basis points (bps) to 13.7 per cent in the September quarter from 15.37 per cent stake in the June quarter.

Federal Bank (246 bps), City Union Bank (133 bps), ICICI Bank (117 bps), HDFC Bank (80 bps), DCB Bank (43 bps), Kotak Mahindra Bank (37 bps), and RBL Bank (20 bps) are the other banks where FIIs have pruned their stakes. Among the above, DCB Bank and Karnataka Bank have reported a rise in slippage in the SME loan book in the September quarter. Management commentary from some of the other private banks also pointed to pressure in SMEs.
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In a recent note, foreign broking house Macquarie pointed out that some foreign investors held an “all-round pessimistic” view of Indian banks. “Investors are worried about second order impacts from new stress emerging in the mid-corporate and SME space, as well as rub off effect on retail asset quality,” the Macquarie note read.
The report was based on interactions with 40-odd investors based out of Singapore and Hong Kong.

Govt may allow services units in SEZs to accept payments in rupee: Report

The commerce ministry is working on a proposal to allow domestic companies to make payments in the rupee currency for services obtained from special economic zone units, sources said.
The proposal is aimed at promoting the growth of IT units in special economic zones (SEZs).

At present, domestic firms are required to pay in foreign exchange for services rendered by a SEZ unit. However, this norm is not applicable for sale of goods, for which payments could be made in the rupee terms.
The ministry is in the process of preparing a proposal in this regard as it needs approval of the Cabinet first and then from Parliament as it requires amendment in the SEZ Act, 2005, they said.
It was a long pending demand of the industry to make services at par with the manufacturing sector in terms of payments in the rupee terms for supply made to domestic tariff area (that is companies outside SEZs).
An industry expert said that due to this provision in the law, the government too was not able to give contracts to SEZ units.
This law was hindering the growth of IT units in SEZs. Companies outside these zones have to go through the hassle of changing rupee to foreign exchange for payment purpose, the expert said.
The ministry has discussed the matter with the Central Board of Indirect Taxes and Customs (CBIC), which has favoured the proposal.
The commerce ministry would also hold deliberations with the Reserve Bank of India as the requirement of receipt in foreign exchange is fulfilled procedurally as per the RBI.
SEZs, which emerged as major export hubs in the country, started losing sheen after the imposition of minimum alternate tax and introduction of a sunset clause to end fiscal incentives.
These zones are treated as foreign entities in terms of provisions related to customs.

Deep discounting not part of ease of doing business, govt tells e-tailers

Being allowed predatory discounting and a conducive business environment are not the same thing, the government plans to make this clear to digital commerce entities. In the e-commerce policy it is preparing, this point will be underlined, said sources in the commerce ministry.
‘Deep’ discounting has been a constant complaint of traders and offline (traditional) selling entities.

“E-commerce players keep saying that the business environment needs to improve; it should be more open, so that more foreign investment comes in. But when you do a deep dive, their main bone of contention is around the discounts and sales they hold, and the protests around it. These two things are completely different and in the e-commerce policy, we will make this clear. We, under no circumstances, will allow or condone predatory pricing,” said a senior in the ministry.
The policy is, after delays, likely to be ready only next year.
The policy might not only limit the maximum discount on a product but also ensure the seller is giving it. “Under the policy guidelines, (e-com) platforms might have to a give detailed break-ups of the discount in the pricing details, to ensure e-commerce portals are not the ones financing it. Companies would even need to get yearly audits of discounts, done mandatorily by independent auditors, to ensure there was no predatory pricing,” said a senior official at the ministry.
Time and again, the government has made it clear that it wants to ensure offline retailers are not rooted out by major e-commerce firms. Online marketplaces, on their part, have always maintained that they were following all the guidelines around discounting and that it is the seller offering the discounts.
Traditional traders have said they want early issue of the policy, with clarity on the issue of predatory pricing.
ALSO READ: CAIT urges PM not to concede any ground to Walmart, e-commerce firms
“Policy is the domain of every country and if multinational corporations (the reference is to the Indian arms of Amazon and Wal-Mart) wish to carry on business, they are under obligation to follow the policy in letter and spirit. Before raising any voice on policy, these firms should realise that their business model across the globe is controversial and questionable,” said Praveen Khandelwal, secretary-general, Confederation of All India Traders (CAIT).
E-marketplace firms periodically offer deep discounts. “Both Amazon and Flipkart (now part of WalMart) have continued to stress that discounts are provided by sellers, and that the e-marketplaces themselves have not directly or indirectly influenced them on the matter. But, we have received multiple representations from trader bodies like CAIT which say e-marketplaces continue to advertise mega sales during Diwali or New Year under their own brand name, not those of major sellers who are providing discounts," said a senior official who is looking at the matter.
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As a result, the government might also speak to major sellers registered on the platforms, he added.
The initial draft of the proposed policy had suggested a sunset clause for predatory pricing that clearly spelt 'zero payment offers', 'flash sales' and 'unlimited offers' as strictly restricted. "It had also sought to define these practices and set fixed norms for each. Now, more than ever, there is a need for this,” says a senior official from the department for promotion of industry and internal trade.

AGR verdict: Sunil Mittal approaches Prasad, others over statutory dues

Telecom tycoon Sunil Bharti Mittal on Monday came knocking at the doors of top government officials including Telecom Minister Ravi Shankar Prasad, over billions of dollars in statutory dues like spectrum and licence fee liability that his and other telcos had not fully provisioned in their accounts.
Sources said Mittal first met Prasad and then Telecom Secretary Anshu Prakash, apparently over the liability that arises from the Supreme Court upholding government's view on how revenues should be calculated for sharing of statutory dues.
Kumar Mangalam Birla, head of Vodafone-Idea Ltd that also has been severely hit by the apex court ruling, was expected to come for meeting but has now sought a different time, they said.
Delivering its verdict, the Supreme Court had on October 24 upheld government contention that non-core revenue in telecoms groups should be included in adjusted gross revenue -- the figure on which statutory levies are charged.
Sources said the telecom operators are looking at the government for a possible relief such as waiver of penalties and interest though the Supreme Court had categorically stated that companies must pay many years worth of charges plus interest and penalties.
Ideally, companies are required to make provisions in their books for any potential liability that may arise from a legal dispute.
While emails sent to Bharti Airtel and Vodafone-Idea on the impact of the Supreme Court judgment and provisioning remained went unanswered, industry sources said provisioning for the full amount was not made. The companies also did not response to a seperate email on meeting with the Government.
Also, there is no sight of promoters willing to infuse more equity into the companies to clear the liabilities.
According to the DoT's calculations, Bharti Airtel faces a liability of around Rs 42,000 crore after including licence fees and spectrum usage charges while Vodafone-Idea may have to pay about Rs 40,000 crore.
Initially, Telecom Service provider (TSPs) had to pay a fixed license fee. The Government in 1999 offered a new package, known as 'Migration Package', giving an option to the licensees to migrate from fixed license fee to revenue sharing fee with a principle of 'Pay as you Earn'. This was accepted by the operators unconditionally.
License fee and interest till the date of migration i.e. July 31, 1999, was paid by them and no dues were waived off.
The 'revenue sharing' regime was so designed that the Central Government becomes a partner or sharer of 'gross revenue of the company'. An annual license fee is payable as a percentage of Adjusted Gross Revenue (AGR). The license fee initially was 15 per cent of the AGR and progressively reduced to 8 per cent in 2013 and many saw it as an extremely beneficial regime for telcos.
However, AGR calculations became a point of dispute with some in the government feeling that funds due to the exchequer were being diverted to create new businesses within and outside the country.
The Supreme Court had in an order way back in 2010 ruled that "it was not open to a TSP to turn around and agitate any dispute after availing of the migration package". And then again in October 2011, it held that "TDSAT has no jurisdiction to exclude certain items of revenue, which were included in the definition of AGR."
But the TSPs neither paid the government nor created any provisions in their books of accounts for past and future payment of license fee (LC) and spectrum usage charge (SUC) on the basis of law laid down by the Supreme Court, sources said.
Non-disclosure of known contingent liability and outstanding dues pertaining to LF and SUC in the statement of accounts and balance sheet is an economic offense under the Companies Act.
Supreme Court in the judgment last week said that "No litigant can be permitted to reap fruits on such inconsistent and litigate for decades in several rounds which is not so uncommon but is disturbing scenario projected in many cases. We have examined the matter upon merits and then the aforementioned conclusions indicate the frivolous nature of objections."

After the judgment, the telcos have stated that they don't have money to pay the government.
Government officials, however, feel both companies have enough capacity and capability to raise funds through means such as equity from promoters and monetizing some of their assets. Any waiver of dues would be at the cost of taxpayers and public exchequer money and open to review by government auditor, CAG, they added.

US equity outflows to cash, bonds biggest since 2008: Goldman Sachs

The outflow from US equity funds this year has been the biggest since 2008, relative to the flood of money into cash and bonds, according to Goldman Sachs Group Inc.
That still leaves cash exposures “near historical lows,” according to Goldman strategists led by David Kostin. At 12 per cent, the aggregate allocation to cash is only in the fifth percentile of the past 30 years, they calculated.

“High uncertainty, investor fears of a recession, and low starting cash allocations will likely limit a significant increase in equity allocations” in 2020, the Goldman team wrote in an Oct. 25 note.
Just like this year, corporate demand will be the top source of US equity buying in 2020, Goldman projected. While buybacks may drop, net demand is still seen as strong thanks to diminished initial public offerings and a rise in cash-based mergers and acquisitions. Households and foreign investors will also be net buyers, while pension funds keep whittling down their allocation, as they have since 2009, Goldman said.

Among the bank’s 2020 forecasts:
Net corporate purchases for US equities will total $470 billion in 2020, down 2% from this year
Foreign investors will buy a net $50 billion
Households will add a net $30 billion
Purchases by exchange-traded funds will be a net $150 billion, less than the five-year average of $220 billion
American stock funds have seen $100 billion of outflows so far in 2019, on pace for the second-largest drawdown in 15 years, with actively managed mutual funds seeing a $217 billion exodus, according to data compiled by Goldman. Bonds have enjoyed a $353 billion inflow, while cash has seen a $436 billion influx, the Goldman analysis showed.

Whistleblower case: Infosys writes to clients as allegations reveal dissent

Infosys has written to clients apprising them of them of the developing situation on whistle-blower allegations and subsequent investigations by the company and regulators, said sources in the company.
Analysts said the relationship of the Bengaluru-headquartered information technology (IT) major with its clients was unlikely to be affected by the recent developments, but the complaints of the whistle-blowers reflected internal dissent in the company.

“From the point of view of clients this will have little or no impact,” said Peter Bendor-Samuel, founder and chief executive officer (CEO) of global IT outsourcing consultancy firm Everest Group, adding: “They don’t care about accounting practices and where the CEO is travelling. Their experience with Infosys has been good and that is what they care about.”
He added current whistle-blower allegations are reflective of the internal dissent in the company and this did not augur for Infosys.
“Internal wounds can be clearly perceived from the non-accounting portions of the whistle-blowers’ letter,” said Bendor-Samuel, adding: “Protracted infighting distracts the IT firm from the heavy lifting of transformation which it must continue to push through if it has to emerge as a leader in this new market.”
ALSO READ: Infosys turmoil: Employees worry its focus on values is fading
An anonymous group called Ethical Employees, in a letter on September 20, alleged that Infosys’ current management was taking “unethical” steps to inflate short-term revenue and profit. It also flagged concerns about several zero-margins deals, which were closed by the current management “flouting norms”.
The letter was made public last Monday, after which Infosys’ stock price was badly hit, though it has recovered a bit in the last trading session. The IT major is currently facing investigations from the Securities and Exchange Board of India and the US SEC, apart from class-action suits from some US-based law firms.
Global analysts said some of the allegations made by the whistle-blowers were quite petty and accounting for large deals was often complicated, with no one correct method. Infosys CEO Salil Parekh was still highly regarded by clients.
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Hansa Iyengar, senior analyst at London-based Ovum Research, said, “Salil Parekh has brought in a clear vision for Infosys and his efforts have made the company a stronger player, backed by steady growth across the business. As of now, Parekh continues to be the CEO of Infosys and there is no indication that he is leaving the company.”
“Big deal accounting is complex and there are several legitimate approaches to take,” said Bendor-Samuel, adding, “It would not be surprising if the new leadership changed the approach and some members of the existing accounting and finance teams disagreed. This would not, however, make the new treatment wrong.”
The whistle-blowers had also written about the CEO being absent from the company headquarters and made unpleasant remarks about the board.
“Let’s not make a mountain out of a molehill; let investigations take their course,” said Iyengar of Ovum Research.

Rs 10,247-cr Cairn retro tax case: Tribunal defers award to mid-2020

More than a year after hearings in an arbitration initiated by Cairn Energy against Rs 10,247-crore retrospective tax demand ended, the three-member Arbitral Tribunal has indicated that the award will be further delayed to mid-2020, the British firm said on Monday.
The international tribunal, which had in August last year completed main court hearings in the British company's challenge to the Indian government using retrospective legislation to seek Rs 10,247 crore in taxes, was supposed to give an award by February 2019, but in March it delayed it to 2019-end and now to summer of 2020.

"The Arbitral Tribunal has indicated that whilst it is not yet able to commit to a specific award release date, it expects to be in a position to issue the Award in the summer of 2020," Cairn said in a statement.
No reasons have been given by the tribunal for the delay in award.
Cairn said it is seeking full restitution for losses totalling more than $1.4 billion resulting from government expropriation of its investments in India in 2014.
The company, which gave the country its biggest oil discovery, received a notice from the Income Tax Department in January 2014, requesting information relating to the group re-organisation done in 2006.
Alongside, the department attached the company's near 10 per cent shareholding in its erstwhile subsidiary, Cairn India. In March 2015, the tax department sought Rs 10,247 crore in taxes on alleged capital gains made by the company in the internal reorganisation.
Cairn Energy had in 2010-11 sold Cairn India to Vedanta. Following the merger in April 2017 of Cairn India and Vedanta, the UK firm's shareholding in Cairn India was replaced by a shareholding of about 5 per cent in Vedanta issued together with preference shares.
In addition to attaching its shares in Vedanta, the tax department seized dividends due to it from those shareholdings totaling Rs 1,140 crore and set off a Rs 1,590 crore tax refund against the demand.
Cairn Energy in 2015 initiated an international arbitration to challenge retrospective taxation.
Pending final award, the tax department sold Cairn Energy's shares in Vedanta to recover part of the tax demand.
"Cairn continues to have a high level of confidence in the merits of its claims in the arbitration and is seeking full restitution for losses of more than $1.4 billion," the statement said.
The company said in compliance with direction from the tribunal, it is reproducing in full the text of the panel's communique.
"The Arbitral Tribunal has indicated that it expects to be in a position to issue the Award in the summer of 2020, but has clarified that to avoid any misunderstanding, the Tribunal did not intend firmly to commit to a specific Award-release date, nor is it yet in a position to do so," it said quoting the communique from the tribunal.
Cairn's claim under the UK-India Investment Treaty is for monetary compensation of $1.4 billion, the sum required to reinstate the company to the position it would have been in, but for the actions of the tax department since January 2014.
It had previously stated that the arbitration panel is expected to issue a binding and internationally-enforceable award.