• SEBI eases rules for angel funds

The Securities and Exchange Board of India (SEBI) has liberalised norms for angel funds to invest in early-stage entities as part of its attempts to facilitate fund-raising for start-ups.

The capital markets regulator also enhanced the scope of investment of foreign investors in unlisted debt securities.

Regulations amended

The board in its meeting decided to amend the SEBI (Alternative Investment Funds) Regulations, 2012 based on the recommendations received from the ‘Alternative Investment Policy Advisory Committee’ that was constituted under the chairmanship of N. R. Narayana Murthy.

The regulator has increased the upper limit for number of angel investors in a scheme from forty nine to two hundred.

Angel Funds will also be allowed to invest in start-ups incorporated within five years instead of the earlier norm of three years.

Minimum investment

The requirements of minimum investment amount by an angel fund in any venture capital undertaking have been reduced from Rs.50 lakh to Rs.25 lakh. Further, the lock-in requirements of investment made by angel funds in the venture capital undertaking has been reduced from three years to one year.

Such funds have also been allowed to invest in overseas venture capital undertakings up to 25 per cent of their investible corpus in line with other Alternative Investment Funds (AIFs).

“This will greatly benefit start-ups looking for raising venture funding not just for the money but for the other value addition that raising money from a venture capital firm brings such as direction and mentorship from seasoned investors,” said Nishit Dhruva, managing partner, MDP & Partners, a law firm.

Unlisted NCDs

The regulatory watchdog has also permitted foreign portfolio investors (FPIs) – FIIs in common parlance – to invest in unlisted non-convertible debentures and securitised debt instruments of a public or private company based on the guidelines issued by the Ministry of Corporate Affairs (MCA).

Earlier, FIIs were allowed to invest in such securities only if it was issued by a company from the infrastructure sector.

Such investments, however, will be subject to a minimum residual maturity of three years and end use-restriction on investment in real estate business, capital market and purchase of land.

Exchange disclosure

The regulator also clamped down on agreements between company management personnel and shareholders that assure certain compensation or share in profits to the employee.

SEBI has stated that all such agreements entered into during the last three years will have to be disclosed to the stock exchanges and companies will have to seek an approval from the public shareholders of the company.

Further, interested persons involved in the transactions will have to abstain from voting on the said resolution, the capital markets regulator said.

  • Securing a cashless society

With the current cash flow deficit, people are being forced to make digital payments. Without proper precautions and security policies, the highly reactive nature of cyber security leaves us vulnerable to cyber attacks.

One of the biggest financial data breaches in India, exposed in late October, had compromised the financial data of over three million users and victimised major banking companies. The breach occurred when a network of Hitachi ATMs infected with malware enabled hackers to steal users’ login credentials and make illegal transactions. Following this, companies issued new cards and asked customers to limit their ATM usage to those operated by their banks. However, a few weeks after the breach, the demonetisation announcement pushed people to do just the opposite — rush to withdraw money from just any functioning ATM. Till date, there has been no communication from banks or the Reserve Bank of India assuring the public that the infected ATMs have been taken out of service or fixed to prevent further breaches.

Digital transactions

Over the past week, digital payments have hit record transactions: Pay TM said there was a 200 per cent increase in its mobile application downloads and a 250 per cent increase in overall transactions; MobiKwik said its user traffic and merchant queries increased by 200 per cent within a few days of the government’s announcement. Companies such as Oxigen and Pay U have also seen a rise in their service usage.

This trend is certainly heading in the right direction if we are moving towards a cashless economy, but the speed of technological development and its integration into our economy far supersedes the speed of defence mechanisms and protocols that could mitigate cyber attacks. Cyber security is unparalleled and reactive in nature, which begs the question: is it safe to utilise these new payment platforms?

Pay TM, for instance, is certified under the Payment Card Industry Data Security Standard (PCI DSS) 2.0 certification, which is the current industry security standard set by American Express, Visa International, MasterCard Worldwide and a few other international dealers. This is an essential certification for companies that store credit card information. Pay TM and other such companies also use 128-bit encryption technology to crypt any information transfer between two systems. It takes more than a hundred trillion years to crack a password under 128-bit encryption. Needless to say, transactions via these companies are fairly secure, hence there is little doubt that companies taking advantage of demonetisation are employing their share of precautions for secure transactions.

However, this does not mean that these precautions won’t make us invulnerable. Apart from login credentials, hackers target other things. For example, just a few weeks back, hackers breached a British mobile company, Three Mobile’s database, putting at risk the private information of six million users, which was later used to purchase mobile accessories at the users’ expense. Other uses for stolen data include underground sales, identity theft, or targeted personal attacks such as extortion. According to the 2015 data breaches study by IBM and the Ponemon Institute, India is the most targeted country for data breaches.

While these attacks may appear sophisticated, there are easier methods that anyone with basic IT skills can deploy. These include creating fake mobile applications and spyware that steal information, or social engineering tactics that make you reveal your login credentials. Forums on the Internet are flush with step-by-step instructions on how to create fake websites that imitate digital payment platforms.

The larger concern, however, is that if companies like HDFC and ICICI, which are most likely proactive in updating their security systems, also experienced cyber attacks, what does that imply about unsuspecting users? Most new users, especially street vendors, have been forced onto the digital payments bandwagon. Are they aware of the security risks involved? And even if they are, what precautions can they take to minimise the potential damage from attacks?

Collective responsibility

Companies, customers, and the government should collectively participate to mitigate cyber attacks and minimise its damages.

First, all companies that offer platforms or services enabling digital payments should increase awareness among their customers of the risks, and educate them on ways to secure themselves. They must employ behaviour analytics and pattern analysis at their fraud prevention departments to predict suspicious behaviour. They must be proactive in looking out for any fake applications or websites that masquerade their service. They must monitor discussion boards, social media platforms, and forums that discuss hacking and fraud tactics, and implement measures to thwart such tactics.

Second, the government should check if the current policies regulating these platforms are adequate and update them regularly. People must be educated on the risks involved, strict policies must be enforced, and companies accountable for not meeting security standards must be held. Benefits that come from overlooking security precautions must be minimised and public-private partnerships on live information sharing about cyber attacks and fraud should be strengthened.

Third, customers should educate themselves about the risks involved and take precautions. They must minimise vulnerability with two-factor authentication and change their password frequently. They must check the authenticity of applications by looking for the number of downloads and read reviews by other users — the higher the number of downloads and reviews, the higher the chances that the application is legitimate. Customers must also check for other application releases from that developer. For instance, they must check the Website’s authenticity by searching for the proper spelling of the Web address, check if the Website is secure by looking out for a green padlock symbol on the left side of the Web address, and keep Web browsers updated so they can recognise illegitimate sites easily.

Prime Minister Narendra Modi recently asked people to embrace the digital cashless world, reiterating that digitisation of economic activities is here to stay. In the midst of going cashless, we should not cast a blind eye to the security aspect of digital payments. We all share a collective responsibility to build a safe and secure digital infrastructure.



  • Rising dollar, falling rupee

Donald Trump’s surprise win in the U.S. presidential elections has lent the dollar new wings. It has soared against most currencies, including the rupee, on the expectation that his economic policies will spur growth and inflation in the world’s largest economy. The prospect of the Federal Reserve raising interest rates provided an updraught that helped the dollar extend a record appreciating streak against the euro last week and pushed the rupee past 68 to a dollar. In Congressional testimony last week, Fed Chair Janet Yellen signalled that the central bank was close to a decision to raise rates again. Some economists predict U.S. GDP growth could see appreciable acceleration in 2017 — with one projection positing even a doubling of the pace by the fourth quarter — if the new administration delivers on some of its promises, including tax cuts, deregulation and infrastructure spending. In fact, with a Republican majority in both the House of Representatives and the Senate, Mr. Trump could benefit from smoother Congressional backing for policy initiatives to boost economic activity. U.S. stocks and bonds have also reflected the optimism over the outlook for U.S. growth and prospects that increased fiscal spending will help reflate the economy, with the S&P 500 Index adding gains for the second straight week and benchmark bond yields climbing in anticipation of faster inflation.

For the rupee, which has slumped 2.3 per cent from its 66.62 a dollar close on November 8, the flight of capital from emerging market assets has inflicted significant pressure that has been exacerbated by the Centre’s decision to withdraw higher denomination currencies. Foreign institutional investors have sold more than $2.5 billion of Indian equity and debt holdings so far this month, compared with the about $1.5 billion they offloaded through October. With the demonetisation move infusing a surge of liquidity into the banking system, domestic interest rates are expected to decline, making the rupee less attractive to investors seeking to benefit from an interest rate arbitrage. And with consumption and broader economic activity predicted to take a hit on account of the shortage of cash in the wake of the currency move, GDP growth may slow sharply. That in turn could weaken overseas investor appetite for rupee assets. The task before policymakers, and the monetary policy committee that is set to meet on December 7, a week before the Federal Open Market Committee’s rate decision, will be to reassure markets and investors that India’s economy remains robust.


  • India is ‘non-committal’ on market economy tag for China

India is not inclined to automatically grant the coveted ‘Market Economy Status’ (MES) to China this December under World Trade Organisation (WTO) norms, highly placed official sources said.

Citing the provisions in the ‘Protocol on the accession of China to the WTO’ in 2001, Beijing has said WTO member countries must fulfil their promise to deem China a ‘market economy’ from December 2016.

However, granting MES to China will severely curb the ability of nations including India to impose anti-dumping duties on “unfairly priced” Chinese imports. The matter was discussed recently by the Ministries of Commerce & External Affairs, with the Centre for WTO Studies (at the Indian Institute of Foreign Trade).

Of the 535 cases where anti-dumping duties were imposed by India during 1994 to 2014, a maximum of 134 has been on goods from China.

To refuse China the ‘MES’, India has taken sides with the U.S. and European Union in stating that unlike in ‘market economies’ where prices of items are market determined (based on demand & supply conditions), there is still a significant government influence in the Chinese market.

In this regard, they have referred to the Chinese government subsidies for various sectors, currency ‘manipulation’ and the related ‘price fixing’, ‘absence of transparency’ in lending rates and bad loans of banks as well as in minimum wages & property rights besides the ‘lack of’ proper business accounting standards – all of which in turn cause distortions in global trade, the sources said.

As of now, India is “non-committal” on according MES to China, the sources said, adding that “ultimately it will be a political call after considering the stance of other countries and India’s relations with China.

“The intention will be to ensure India’s manufacturing sector is not hit by unfairly priced Chinese goods.” The sources said decision to “wait-and-watch and to further study the matter” has been conveyed to the Permanent Mission of India to the WTO at its headquarters in Geneva.

There is a clause in the 2001 Protocol, according to which countries need to grant the MES only after China has established that it is a ‘market economy’ “under the national law of the importing WTO Member” — something that allows a country to contend that China might be able to establish itself as a market economy only in the case of some goods, and not all, sources said.

The sources said several nations that have a strong manufacturing base are concerned about according MES to China, while nations including in Africa and Latin America — dependant on Chinese investments to boost manufacturing — are inclined to grant Market Economy Status to China.

  • A pivot to China?

Till 1750, the Asian giants produced half of global economic output before gunboats and colonisation reshaped trade, and subsequently production and consumption. There is now a consensus that the locus of global wealth is again going to be in Asia. The implication of the interruption, or reversal, has not been explored as the strategic dimensions continue to be seen through a Western prism.

Western analysts focus on the relative decline of the U.S. rather than on Asia’s re-emergence. The underlying assumption is that the world needs global institutions, rules and agreements to solve problems that countries cannot solve on their own, while not addressing the question that has now come centre stage — who sets the worlds standards and for what purpose?

Containment, relevant during the Cold War, is not proving effective in Asia with China emerging as the largest global economy. Alliances are also losing relevance in Asia as countries are gaining influence more because of the strength of their economy than the might of the military. Moving away from global rules, for example the climate agreement, questions their relevance for meeting global concerns.

Globalisation, driven by the ‘Washington Consensus’, dominated global policymaking, with the World Bank, International Monetary Fund and World Trade Organisation as the institutional centres of gravity. Developing countries have complained for decades about the ‘terms of trade’, ‘conditionality’s’ and intellectual property rights linked with trade sanctions. The limits to trade liberalisation are now also being raised in the West.

David Ricardo’s arguments of comparative advantage of countries and Adam Smith’s emphasis on competition creating wealth are not relevant in today’s knowledge-based, urbanised world of middle-class consumers and global value chains. The problem is not trade, which has been happening for over 2,000 years, but the nature of recent rules going beyond facilitating commercial transactions.

Donald Trump, recognising global trends, is reviewing the role of the U.S. based on alliances, rules and values. He prefers an “America First” approach, wants to “reset” ties with Russia around “mutual respect”, and wishes for the “strongest relationship” with China, with trade as the foundation of bilateral ties.

The thought leadership for shaping global politics, with Asia restored at its economic centre, should revert to the 2,000-year-old pattern of commercial transactions, with trade rules limited to standardisation and dispute settlement. Asian prosperity is more than a geo-economic or geopolitical concept, underlined by President Barack Obama’s failed attempt to prevent Asia from setting the new rules for trade.

China and India have much in common, if we move out of the Western frame, as both are civilisational states whose contours were shaped by major snow-fed rivers. In both states, no strategic thinker advocated conquest of lands outside this sphere, in sharp contrast to Western strategic thinking on control of the seas, security alliances and rules pushing common values as the best way of organising international relations.

In political thought also, Amartya Sen has pointed out, religious tolerance and human rights are not Western concepts. Chinese civilisation has had a more secular orientation than any other civilisation. In Indian political thought, authority was based on the interests of all. In both civilisations, the king was regarded as guardian and not creator of the law.

The Asian giants have yet to reconstruct international relations theory around a global vision of sharing natural resources, technology and prosperity — issues they have together fought for over 50 years in the United Nations.

China took advantage of global value chains shaping long-term economic calculations, redefining global power and securing a head start over India. China will remain the world’s largest producer of goods and India can be the largest producer of services. The services sector will be the real driver of future growth in Asia, with affluence concentrated in cities, giving a younger India future advantage.

India has the capacity for global leadership as the hub of the new knowledge-based order, including new pharmaceuticals and crop varieties, as it is the only country with both extensive endemic biodiversity and world-class endogenous biotechnology industry. Along with global leadership in software-led innovation, foundation of the new low-carbon digital-sharing economy, India is developing low-cost solutions for urbanisation, governance, health and education problems. Sharing solutions to common problems as a new form of international relations will provide legitimacy to reshape the global order with sustainability as the defining value.

China is keen to have India on board its One Belt, One Road (OBOR) initiative for connectivity-led trade in Eurasia. It has suggested a free trade agreement and both countries recognise the synergies for achieving the ‘Asian Century’. India’s knowledge-based strengths complement those of China in infrastructure and investment. India should seek to ‘redefine’ OBOR, adding a stronger component for a ‘Digital Sustainable Asia’, and for Eurasian connectivity to have two nodes, as has been the case throughout civilisation.

A mutual recognition of ancient special interests in the South China Sea and the Indian Ocean should be a strategic objective. This step will enable an understanding on issues like membership of the Nuclear Suppliers Group, global terrorism, and Gwadar, which are irritants in the development of stronger ties. Prime Minister Narendra Modi must recognise that trade will trump security.

Mukul Sanwal is a former UN diplomat and currently Visiting Professor at the Tsinghua University, Beijing, China.

  • A challenge and an opportunity

A year and a half after China and Pakistan announced plans for an Economic Corridor, the CPEC, to connect “Kashgar to Gwadar”, the two countries operationalize the trade route this week, with the first shipment moving to Gwadar port and on to the Gulf and Africa. Many of the infrastructure and energy projects that are part of CPEC, worth an estimated $46 billion, are already under way. Of this, $35-38 billion is committed in the energy sector, in gas, coal and solar energy across Pakistan, with the combined expected capacity crossing 10,000 MW. This is roughly double the current shortfall the country experiences. In addition, the 3,000-km rail and roadway project is expected to generate 700,000 jobs by 2030. While Pakistan sees CPEC as a game changer, there are many challenges. There are some misgivings domestically, with critics questioning the project’s viability, and some accusing China of launching a second “East India Company”. There are the security challenges too, especially in the western areas near the key Gwadar port, where militants ranging from Baloch nationalists to the Taliban and the Islamic State have carried out attacks. Systemic challenges include project delays in the CPEC’s first year, which the World Bank warns could prove to be an impediment to Pakistan’s overall growth. Pakistan-India tensions, unless contained, too could endanger sectors of the project where Pakistani troops are engaged in providing security. Finally, the economic slowdown in China and the political instability in Pakistan could impact the project’s future as well.

However, these internal considerations for Pakistan shouldn’t blur the bigger picture for India: CPEC is now a reality. In the past India’s reaction to the project, announced a few weeks before Prime Minister Narendra Modi’s visit to China in 2015, had turned from dismissal and disdain to disapproval and then to outright opposition. India even raised concerns over projects in disputed Gilgit-Baltistan at the UN General Assembly. Not only has the project gone ahead despite the objections, but China now sees CPEC as a physical link between its One Belt, One Road (OBOR) project and the Maritime Silk Route (MSR). India has refused to be a part of either. That Sri Lanka, Bangladesh and Afghanistan are all on board the OBOR and the MSR should give India pause. It is important for Delhi to also take a closer look at the security implications of the China-Pakistan clinch that is fast drawing in Russia in the north, all the way to the Arabian Sea, while China plans a floating naval base off Gwadar.

  • Watering the green shoots

We are now in the middle of the fiscal 2016-17. The main monsoon is also over. This is an appropriate time to take a look at the economy and assess where we are headed. Two important questions that spring up are: are there green shoots which show a decisive revival of the economy, and have we laid the foundation for a faster rate of growth of the economy in the medium term?

In analysing the trends in the economy, we continue to be plagued by conflicting sets of data. National income data are available only for the first quarter (April-June). These data show that GDP grew by 7.1 per cent and that value added in manufacturing grew by 9.1 per cent. However, according to the Index of Industrial Production (IIP) during this quarter, manufacturing fell by 0.6 per cent. The Central Statistics Office (CSO) now uses IIP data for measuring only a small segment of manufacturing. It uses the corporate data for estimating 75 per cent of the manufacturing sector. While one cannot fault the CSO for the new methodology, it has to carefully cross check the data it relies upon. Analysts need some amount of reassurance from the CSO. All the same, an attempt can be made to find out whether the current year will be better than the last year by looking at the performance of different segments.

From the demand side, there are four elements that we need to examine: private consumption expenditure, government expenditure particularly on investment, private investment particularly corporate investment, and external demand. As far as private consumption expenditure is concerned, a major factor contributing to a push is the implementation of the recommendations of the Seventh Pay Commission. Government’s salary and pension expenditures are expected to rise by 20 per cent. As those recommendations were made effective only from August 2016, the impact on the production of consumption goods will be seen only in the second half. There is evidence of some sectors like two-wheelers growing fast. The impact of the good monsoon on rural demand may also show up in the second half.

Total Central government expenditures in the first half were 52.0 per cent of the budgeted expenditures for the year. This is only a shade higher than previous year. Capital expenditures have shown a rise of 4.6 per cent over the previous year. Increase in capital expenditures is welcome as they lead to greater investment. In September 2016, capital expenditures grew by 20 per cent on year-on-year basis. However, this was mainly due to the increase in loans disbursed. It is to be noted that the bulk of the public investment comes from public sector enterprises. As of now, there is no information how much additional investment has been made by PSUs. Roads and railways seem to be doing well.

The third important segment is corporate investment. In the last several years corporate investment has been roughly one-third of the total Gross Fixed Capital Formation. Therefore it is critical to watch its behaviour. The Reserve Bank of India has been making a forecast of corporate investment based on a methodology outlined by me. In the September 2016 issue of RBI Bulletin, it has provided the outlook that emerges for 2016-17. Bulk of the investment expenditures in any year are the result of the projects initiated in the previous two to three years. With the slowdown in new projects undertaken in recent years, it is unlikely that investment expenditures by the corporate sector in 2016-17 can be higher than in 2015-16. The study by RBI staff indicates that substantial investment in the projects initiated in 2016-17 will be required to equal previous year’s total investment expenditures. The total cost of projects initiated with institutional assistance in 2015-16 was Rs.954 billion and Rs.878 billion in 2014-15. All this is a far cry from the figure of Rs.2, 754 billion in 2006-07.

The external demand is largely a reflection of the world economy which shows a sluggish recovery. All forecasts indicate a slowing down in the world growth rate in 2016. The expectation is a slight improvement in 2017. World trade is also slowing. Exports of India started declining in 2015-16. For the year as a whole, the decline was 15.5 per cent. Much of this was due to the fall in the value of oil exports. However, some improvement in the current year is seen. The decline in exports during April-September was 1.26 per cent. This is on a base which had already declined. In the month of September 2016, exports grew by 4.03 per cent. In an environment of declining world trade, it is not surprising that India’s exports fell. However, data for 2015 showed that the India’s share in world exports has had a small decline, which indicates our exports are slowing down more than world exports. But as indicated earlier, India’s exports are doing a little better this year. We need to maintain this momentum. India’s current account, however, has been comfortable because of the sharper decline in imports. The external environment may not provide much stimulus by way of demand.

Thus, the positive signs in the economy are an improved agricultural performance and a pick-up in rural demand, some increase in private consumption expenditure primarily due to the implementation of the Seventh Pay Commission recommendations and an enhanced capital expenditure by government. The negative indicators are a continued stagnation in corporate investment and a poor external environment. The growth rate of GVA (gross value added) at basic prices in 2015-16 was 7.2 per cent. This year it may be slightly better at 7.6 per cent mainly because of improved agricultural performance. This estimate of the growth rate will undergo a downward revision if the disruptions caused by demonetisation persist for a long time.

The Indian economy has acquired a certain amount of stability. Prices are under control. Both CPI (consumer price index) and WPI (wholesale price index) inflation are below 5 per cent. Improved agricultural performance may further moderate food prices. The fiscal picture has been under control, even though as of now the fiscal deficit is running high. The current account deficit remains subdued. For the current year, it may be lower than last year’s level of 1.1 per cent of GDP. All these are favourable factors for sustained economic growth. The banking system is however under stress.

On the reforms front, there has been some improvement. Initially, there was the amendment to the Insurance Act to facilitate larger foreign investment. The Bankruptcy Act has been enacted. The real estate sector now has a regulator. Finally, the goods and services tax is becoming a reality. All of these are enabling legislations. The impact of these legislations on the economy will take some time to come. But they are moves in the right direction.

To maintain a high growth rate in the medium term, a kick start in investment is imperative. This is yet to happen, even though the investment sentiment is slightly better today. But more than ever, non-economic factors will play a key role determining if this sentiment will be sustained or not. Policy-makers need to be conscious of this and keep the focus on growth, and away from divisive and disruptive issues.