Current Affairs : Economy - Major Issues 01 to 10 August 2010

CAG Weekly
(Current Affairs & GK)
By Om Prakash (Goldy sir)

Social investing coming of age in India?

• Social investing refers to investing in businesses where the pursuit of profits is accompanied by the premise of social good.
• A few Venture Capital funds started the trend (in 1997) in India where they see in people a genuine ability to pay. These VCs, which started investing in social businesses at various points between 1997 and 2009, have invested $220 million in such ventures in India so far. In the next six months, they say, they expect to add a combined $53 million.
• These investments were made in 77 social businesses in India. But there hasn’t been a single exit. In conventional commercial ventures, VCs work with a holding period of 3-5 years. In social businesses, the holding period is longer  typically, 6-8 years.
• Traditional VCs are beginning to see the base of the pyramid as future consumers, with significant collective buying power. The growing presence of traditional VCs in the social-investing space is opening up a debate on the ‘social impact’ of the businesses they are investing in. In other words, the profitability of a scalable business model is much more attractive to such funds than doing social good, which can be incidental.

A recap on what is holding up the Doha round of WTO talks

• The current round of multilateral trade talks, launched in Qatar’s capital Doha in November 2001, hit a road-block in the July 2008 Geneva mini-ministerial following a disagreement over a handful of issues such as protection to poor farmers against import surges, steeper duty cuts on select industrial goods and commitments from the US on reducing its cotton subsidies.
• Apart from unresolved issues in the areas of agriculture and Nama, the entire services chapter remains to be worked out. Tighter rules on antidumping, regime for least developed countries, streamlining of fisheries subsidies and fair implementation of the intellectual property agreement (Trips) are other important issues that need to be sorted out.

RBI unveils draft rules for CDS

• RBI unveiled draft rules for credit default swaps (CDS), instruments which offer protection to investors against non-payment.
• RBI's draft rules on CDS have proposed that regulated lenders, mutual funds and listed companies be allowed to insure themselves against a possible default on the bonds they hold. The protection, which will be offered in the form of CDS, to be sold by banks and finance companies with a net worth of over Rs. 500 crore and bad loans of less than 3%. Banks that intend to sell these swaps will need to have a capital adequacy ratio of at least 12% while for non-banks, the bar has been set higher at 15 %, according to the draft norms.
• In a way CDS works like an insurance cover. The premium cost of cover is reflected in the CDS spread. Higher the spread, the greater is the perception of a risk of defaulting.
• CDS came in for wide criticism after the global financial crisis after it emerged when insurance giant AIG had sold protection against sub-prime loans most of which turned bad.
• There are a number of ways in which CDS in India will be different from those that brought down AIG.

• First, the protection can be sold against risks of a single issue. In the case of AIG, the protection was provided for a mortgage-backed security representing thousands of unknown home loans.
• Secondly, the protection can be bought by only those who actually hold the bonds. The global financial crisis was accentuated by the fact that many investors, who were not holding any bonds, bought protection betting on the default of a particular corporate.
• Thirdly, RBI has severely restricted the number of parties that can offer or sell this product.

 Political solution to the stalled GST reform

• The Centre, which has already bent backwards to accommodate states' concerns, has yet again showed willingness on its part to accommodate states' concerns on the veto power to the Union Finance Minister.
• The Centre decided to have a state finance minster as Vice Chairman of the proposed Joint Council and limit the Union Finance Minister's veto power only to the extent of Central GST.
• The Centre has already diluted its stand on a number of issues to get states on board. It has agreed to a three-rate structure for GST, in line with the recommendation of the state FMs panel, under which goods will attract a levy of 20%, services 16% and essential items a concessional 12%. A list of 99 essential items, exempt under the current value-added tax regime, will also be exempted from tax under the GST. It has also offered to compensate the states in full for any revenue loss on account of implementing GST.

Task forces to monitor microfinance institutions

• Microfinance Institutions Network (MFIN), a self-regulatory organisation of microfinance institutions (MFIs) in India, has decided to set up seven task forces to monitor and manage the MFIs and look into credit bureau, transparency, code of conduct, human resource development, policy issues, product diversification and media relations.
• Addressing a press conference here on Saturday, Vijay Mahajan, President of MFIN, said the organisation had made significant progress in transparency and credit bureau initiatives. It was already in discussions with leading credit bureaus. It was decided that all the 42 MFIN members would participate and co-operate with the task force to create a data base of micro finance clients.
• MFIN, earlier this year, had laid out a code of conduct, which underscored fair practices, good governance and responsible lending. It called for limiting borrowers' group loan sizes to less than Rs. 50,000 in total from not more than three microfinance institutions. The code of conduct also wanted the MFIs to share data with the credit bureaus and adopt whistleblower policy in case of violations. Mr. Mahajan said MFIN had also signed up with MFTransparency.org, a global NGO, to promote transparency in the communication of interest rates to clients. It had also created task forces to work on various parameters of responsible lending.

Controversial ordinance set to become law

• On August 2, the Securities and Insurance Laws (Amendment and Validation) Bill, 2010, was passed in the Lok Sabha. Contrary to what many were hoping for, the government is not allowing the controversial June 18 ordinance to lapse.
• The Bill clearly demarcates the regulatory turf: the unit-linked insurance plans (ULIPs) will be regulated by the IRDA.
• However as stated in the accompanying article, the fracas over regulation has since become a secondary issue.
•  The more controversial aspects of the ordinance, those that impinge on regulatory autonomy, especially of the central bank, have been retained in the Bill and the ordinance is set to become law. A new statutory joint committee to be chaired by the Finance Minister will be set up. It will settle all regulatory disputes over hybrid financial products.
• In a weak concession to the numerous critics of the ordinance, the RBI Governor will be the Vice-Chairman of the new committee, a step above other financial regulators. However, it is clear that the Finance Minister will have the last say. It is also not clear what the existing high-level co-ordination committee on financial markets will do, once the new statutory committee comes into being.