NAMORICA - Modi pledges a stable tax policy to woo US business





`Will Use Coal Scam Order To Clean Up Past'

Prime Miniser Narendra Modi made a powerful pitch on Monday to top honchos of American business and industry , with the promise of a stable tax policy and an assertion that he wants to convert the Supreme Court ruling on coal block allocation into an opportunity to move forward and "clean up the past".

"It is my conviction that tax stability is essential for confidence building," Modi told the chiefs of top US companies over a breakfast meet, among them Google chairman Eric Schmidt, Citigroup chief Michael Corbat, Mastercard CEO Ajay Banga, Pepsico's Indra Nooyi, Cargill's David W MacLennan, Caterpillar's Douglas Oberhelman, Merck's Kenneth Frazier, Carlyle Group's David Rubenstein, and Warburg Pincus' Charles Kaye. He also met CEOs of six other companies, including Boeing, IBM, and GE, in oneon-one meetings.

Modi's comment on a stable tax regime comes amidst severe criticism of the UPA's policies, including retrospective amendments to the law to claim taxes from Vodafone after it acquired Hutch's telecom assets in India. Modi and his team have not shied away from referring to the policies as "tax terrorism".

Asking the CEOs to be part of India's growth story, Modi pledged to smoothen the path for them. "Infrastructu re development is a big opportunity; it creates jobs & enhances the quality of life of our citizens," Modi said.

"India is open-minded. We want change that is not one-sided. Am discussing with citizens, industrialists & investors," the MEA spokesman quoted Modi as saying in a tweet. PM Narendra Modi, during a breakfast meet with industry leaders in the US on Monday, promised a stable tax policy. In the past, tax administration and frequent changes in government policies have been cited as major hurdles to investing in India. In recent years, even Indian business houses have often shunned investing in the country, preferring to go overseas.

The Modi government is keen to revive the investment cycle and is wooing investors, especially in the manufacturing sector, although the PM made it clear last week that the government does not believe in doles and concessions to attract flows into the country. Describing the meeting as "excellent and very good", business leaders said the PM heard their concerns and listed out the government's priority areas. "He answers questions brilliantly and is very focused on improving India. So, we are thrilled to be working with him," Nooyi said.

Mastercard CEO Ajay Banga said Modi can execute plans like he did in Gujarat.

"I have every belief he can do that. I believe then you can have a very good decade or ahead of growth in India and that would make every American investor happy to put their capital, technology and their people into India." Banga said Modi was focused on generating jobs for which there was a need to improve manufacturing, tourism and infrastructure. "His view is that he will get those with clear policies as well as about willingness to execute and he made the point many times over and I think from his perspective of his focus and his energy around Asia," he said.

While Boeing CEO James McNerney, who met Modi separately, promised to "accelerate engagement with India", GE's Immelt said his company is looking to scale up investments. "We discussed India. We are enthusiastic about the changes and the reforms in India and we are anxious to do our part in making India a better place," Goldman Sachs CEO Lloyd Blankfein said.

In a boost to govt, S&P revises India outlook to `stable'





First Such Rating Since Modi Took Over

After years of pessimism on the economy , there were finally signs of positive perception on Friday as Standard & Poor's revised India's rating outlook from `negative' to `stable'. This indicates that there are fewer chances of government and other public sector bonds being treated as junk papers.

The revision is the first measure undertaken by any rating agency since the Modi government took office about four months ago, "Our outlook revision reflects our view that India's improved political setting offers a conducive environment for reforms, which could boost growth prospects and improve fiscal management," S&P said in a statement, which coincided with PM Narendra Modi's US visit, where he will court international investors.

Although India still retains the lowest investment grade rating of BBB+, the news made the rupee gain the most in six weeks and closed 61.15 to a dollar, compared to 61.35 on Thursday . Bond prices too strengthened on expectation that a better outlook may result in higher investment and more dollar flows into the economy .

Besides, it raised hopes of a rating upgrade in the coming months. Finance secretary Arvind Mayaram said the agency is expected to upgrade India's rating in the future."The country is well on a path of faster than anticipated fiscal consolidation and it could be a positive surprise going forward," SBI chief Arundhati Bhattacharya said. But S&P—the only major agency that threatened a downgrade of India's rating in the wake of rising current account and fiscal deficit in April 2012—said it will wait for the economy to grow faster and the fiscal, external or inflation parameters to improve before it decides on an upgrade. It cited at least two constraints—India's weak public finances that may stay weak for some time and low per capita income, which results in a low tax base and gives the government less flexibility in taking dramatic measures during times of economic stress.

The change in S&P's outlook was, however, driven by several factors, which included an improvement in the current account situation on the back on curbs on gold imports as well as India's credit strength, from low level of foreign debt and improved cash availability overseas. The country's "well entrenched democratic political system" and the strong electoral mandate were cited as the third key reason by the agency. "Although the paralyzing effect of legislative gridlock can blunt government effectiveness, our outlook revision indicates that we believe the current government's strong mandate will enable it to implement many of its administrative, fiscal, and economic reforms."

The ratings company said it expected the government to adhere to the fiscal consolidation plan and estimated an improvement in the fiscal performance due to the possible rollout of goods and services tax (GST)--something that the BJP government has identified as a key thrust area.

Sell-off in CIL, ONGC, NHPC may fetch record Rs 46,000cr





Coal India Alone May Match '12-13 Divestment Gains

The government on Wednesday kicked off the most ambitious disinvestment programme ever, aiming to mop up a record Rs 46,000 crore by selling shares in blue-chip public sector companies-Coal India, ONGC and National Hydroelectric Power Corporation (NHPC).

While the exact dates are yet to be finalized, SAIL's disinvestment, which was cleared earlier, is likely later this month, with a 10% stake sale in Coal India expected around Diwali.The energy behemoth will help the government raise around Rs 23,600 crore based on its current share price. If prices hold, this sale alone could match the best ever disinvestment receip ts of Rs 23,957 crore in 2012-13, when the government had sold shares of NTPC and NMDC, among others.

ONGC, where the govern ment can garner close to Rs 19,000 crore via a 5% sale, is expected later in the year as the Centre is awaiting clarity on gas prices before the issue, sources in the government told TOI. Somewhere during the course of the year, it will also sell 11.3% in NHPC which, going by current price, will help generate around Rs 3,100 crore.

Apart from helping improve the government's fiscal health, the issues come with the additional attraction of a higher quota for retail investors as 20% of the sale in case of offer-for-sale, or auction through stock exchanges, will be set aside for small investors.Now, market regulator Sebi has provided additional flexibility for these issues. There are several other companies, such as BHEL, Power Finance Corporation and REC, which are also on the disinvestment department's radar but their stake sale has not been cleared by the cabinet committee on economic affairs. Then, there is Axis Bank, where the government is looking to sell shares held by the Specified Undertaking of the erstwhile UTI, although ITC and L&T, two other prominent stocks, are being retained. The government holds these shares after it cleared all liabilities of UTI. Further, the Centre is looking to offload its remaining shares in Hindustan Zinc and Balco, which had been sold to Anil Agarwal's Sterlite Industries during the Atal Bihari Vajpayee government's term.

Finance minister Arun Jaitley -who attended Wednesday's cabinet meeting within hours of being discharged from hospital -has budgeted for disinvestment receipts of over Rs 58,000 crore during the current fiscal. Going by current trends, he appears to be on course to meet the target.

How to invest in property with Rs 2 lakh





You no longer need deep pockets to invest in property. Find out how Reits will help you participate in the real estate market

If you have Rs 2 lakh to invest, your bank may roll out a red carpet, your stock broker may inundate you with hot tips and the neighbourhood jeweller may even offer a discount on making charges. However, you will probably get laughed out of the estate agent's office.Not anymore. With Sebi issuing final guidelines for real estate investment trusts (REITs), you will soon be able to get a piece of the action in the property market with as little as Rs 2 lakh.

REITs are just like mutual funds, but instead of using the money collected from investors to buy stocks and bonds, they invest in property .Last month, the Union Budget removed an important hurdle by giving pass-through taxation status to REITs. Last fortnight, Sebi issued the guidelines, settling several of the concerns raised by the real estate industry . The launch of REITs will increase the flow of funds to the cashstarved real estate industry . "Even if half of the currently available Grade A office space gets converted to REIT and is listed in the next 2-3 years, it can mean an inflow of Rs 60,000-72,000 crore," says Anuj Puri, chairman and country head, JLL India.High entry barrier Whether you invest in a residential property or commercial space in a metro or tier I city, the minimum investment is normally upwards of `30-40 lakh. Sebi's guidelines for REITs have pegged the minimum investment at Rs 2 lakh, which will allow retail investors to participate in the real estate market. In the secondary market, the minimum holding could be even lower at Rs 1 lakh. "REITs will allow even middle income individuals to invest in real estate. Without this, they can't participate because of the huge entry barrier," says Keki Mistry, vice-chairman and CEO, HDFC. The low ticket size means that investors can diversify their portfolios by including real estate without investing huge amounts in the asset class. The high entry barrier is not the only problem with investments in real estate.With no real estate regulator in place, individual investors are at the mercy of politically connected builders in India. If, however, they invest in a REIT, they will be able to join hands and get bargaining power against the developers.

The other benefit is diversification. When one invests in a real estate project, the returns are dependent on how well that project is received in the market and the rental income it is able to command. On the other hand, REITs invest in several projects and, therefore, provide the benefit of diversification to the investor. With a low entry barrier of Rs 1 lakh in the secondary market when units are listed, an investor can spread his investment across 3-4 REITs launched by different asset managers. The liquidity offered by REITs is another positive feature of this mode. While selling a property can take weeks, even months, REITs will inject liquidity into the investment by listing the units on the stock exchanges. The day is not far when one will be able to buy and sell property at the click of the mouse.How attractive is the investment?
While Sebi has given the go-ahead to REITs, right now they can invest only in commercial real estate. This narrows the scope considerably because most of the action in the sector is in residential real estate. Even in commercial projects, 80% of the investment must be in rent-earning projects. The balance 20% can be in other assets, including projects under construction (restricted to 10% of the total REIT assets), listed or unlisted debt of real estate companies, equity shares of real estate companies having 75% income from realty activities, government securities and money market instruments.

Though some may see this as an unnecessary restriction, the straitjacket of rental yielding projects is actually a blessing in disguise. First, there is major difference between rental yield from commercial and residential properties in India now. "While rental yield on commercial property is slightly lower than the interest rate, the one on residential property is very low. So REITs will not work in the residential market now," says Mistry . If rental yield from commercial projects is less than the prevailing interest rate, why should one consider investing in REITs? "The rental yield is not very attractive now, but is expected to rise in the future," says Ujwala Rao, national director, capital markets, JLL.Besides, there is always the possibility of capital appreciation that will push up the NAV .Bottom of the cycle Still, there are several factors that investors need to keep in mind. As of now, the commercial real estate market is in doldrums. "In several pockets, the price of commercial real estate is around 30% cheaper compared to residential real estate," says Kapoor. Though there is an escalation clause in most commercial real estate projects, it is a users' market and, therefore, they are able to renegotiate the rents downwards. This also means that commercial real estate is reasonably priced right now. There is a greater scope for appreciation. As the economy picks up momentum and commercial activity increases, things are likely to improve. "This is the time to get into commercial real estate because it is at the bottom of the cycle," says Kapoor. Other experts join the chorus of optimism. "For REIT to work, you need a buoyant real estate market. Nothing much had been happening in the past 3-4 years, but things have started picking up now," says Mistry . "Commercial real estate is linked to economic recovery . Rentals may remain under pressure for the next 12-18 months given the oversupply , but with the speed of supply moderating in the coming years, the situation should improve," says Mittal.Taxation of REIT income This was the biggest bone of contention for REITs. The recent budget offered some relief when the finance minister announced that REITs will be a pass-through vehicle. In the earlier structure, both the trust as well as the investors had to pay tax. Now, the trust will not pay tax on income. Only the investor will be taxed when he gets the income or sells the units. However, experts warn that this pass-through benefit is not applicable to all types of incomes from the REIT (see table) "The pass-through benefit is only for interest income earned by the REIT from its special purpose vehicle (SPV). As of now, there is no pass-through for rent or other income received by the REIT from property directly held by it," says Sriram Govind, core member of the international tax team, Nishith Desai Associates. He says the REIT has to pay corporate tax on such income earned by the SPV . Similarly, the REIT will also have to pay capital gains tax on sale of shares of the SPV . There is also no relaxation on the dividend distribution tax on payouts by the SPV to the REIT," says Govind.Though the dividend received from SPVs is taxfree for REIT as well as investors, the SPV would have already paid corporate tax and dividend distribution tax on such income. Factor this tax into the calculation of returns from REITs.

Though the dividend distribution tax is a prickly problem, what more than makes up for it is the treatment of capital gains from the REIT.Since there is a securities transaction tax (STT) on the listed REITs, the long-term capital gains will be tax-free while short-term capital gains will be taxed at a concessional rate of 15%.

However, you need to hold the REIT units for at least three years to qualify for long-term capital gains. In addition, the investor has to pay tax on part of the income received during the period. "The listed pass-through vehicles are at a tax disadvantage," says Feroze Azeez, director, Investment Products, Anand Rathi Private Wealth Management.

Since some of the income from the REIT will be tax-free and some other will be taxable, the big question is, how will investors know the difference? "There will be some reporting mechanism and the break-up will come at the time of income distribution from the REIT," says Rao of JLL.

Interestingly , REITs offer a better deal to NRIs on the tax front. The withholding tax for them is only 5% compared to 10% for resident Indians.And the amount received may be tax-free for them, at least in most countries, while the Indian investors have to pay tax based on their slab rates. If the NRI has to pay tax on the income in the country of residence, he can claim this 5% as a rebate.What are the risks?
The biggest risk can come in the form of developers keeping their prime rent-earning properties and dumping their not-so-good assets on REITs. Though there will be professional valuers, the real estate market is notorious for its opacity . It is still a builder's market and the investors don't have any access to the valuation process. Though the introduction of REITs is expected to improve the situation, the lack of transparency and the black money component in the real estate deals is another possible risk.Finally , there may be stable regular income, but the capital appreciation or depreciation depends on the market price of commercial real estate and, therefore, will be volatile.

Sebi's guidelines for REITs is only the first step. There are bound to be teething problems when the market starts functioning. However, this has paved the way for a more vibrant market for real estate. If you want to invest in real estate but don't have deep pockets, you can consider REITs as the vehicle that can take you there.