Category: Excerpts

The startling disclosure of Rs 10,000 crore of undeclared income under the Centre’s  Income Disclosure Scheme (IDS) made by an unidentified individual in Hyderabad has turned out to be fake. He did not have even Rs 1 crore, I-T department officials said.

This finding deals an embarrassing blow to the Centre’s claim of unearthing about Rs 65,000 crore of undeclared income through the voluntary IDS. It also calls into question the authenticity of other disclosures made under the scheme.

I-T department sources were not ready to disclose the details of the applicant, except for saying that it was a fake disclosure and the same had been conveyed to headquarters.

According to income-tax department sources, the individual runs a small business. His IDS application for Rs 10,000 crore was said to be the single largest amount declared under the scheme nationwide. When I-T officers checked the veracity of the disclosure, they found that the trader made the startling declaration just to attract attention and did not have even Rs 1 crore.

Questions are now being asked whether the IDS was a ruse to convert black money to white. There are fears that those holding black money could approach IDS applicants to convert their stash into white by paying the 45 per cent penalty.

–from Deccan Chronicle

In pre-election speeches in Goa and Karnataka, Modi said that demonetisation was not the last bow in his quiver. “I have more projects in mind to make India corruption-free. …We will take action against ‘benami’ property. This is major step to eradicate corruption and black money”

With the passing of the Benami Transactions (Prohibition) Amendment Act, 2016, Modi now has the statutory powers to go after property crooks, most of whom are either politicians or realtors connected to politicians. The law is draconian and  it can be used to confiscate benami properties. Demonetised money can be laundered sometimes, but confiscated property is gone forever.

Under the law, once the government sets the process in motion, an initiating officer will serve a notice on the benamidaar and take the property under his control. An adjudicating officer will then examine all documents and evidence and pass an order on whether to confiscate the property. Once the property is confiscated, it will be managed by an administrator till a further course of action is prescribed against the offender. What will further strike fear in the minds of beneficial owners and benamidaars is the provision of a jail term and massive fine if found guilty. The amended Act provides for prison terms of up to seven years and fines of up to 25 per cent of the fair market value of the confiscated property.

If the law is used to go after many high-profile benamidaars, the property market will crash. That will bring its own deflationary trends and possibly lead to a systemic crisis, for the real estate industry has deep linkages with the real economy, the asset markets and the financial system.-wrote Jaggi

What is clear is as follows:

1. Banks will benefit, as much of this ₹ 15 lakh crore in currency will get deposited. Even if only 10 % remains with the banks it means an incremental ₹ 1.5 lakh crore of current and savings account ratio (CASA). Interest rates are headed lower system-wide as banks’ cost of funds decline, they lower rates and park these flows into government paper. Already we have seen Indian 10-year yields fall by 40 basis points in the last week, despite yields rising globally. Also remember this money left with the banks will have a multiplier compared to it sitting in cash. The system should be awash in liquidity.

2. The Reserve Bank of India (RBI) will cut rates sharply and quickly. This reduction in currency will be a deflationary shock, with certain asset markets declining sharply and economic activity weak for the next two quarters at least. Inflation will decline giving the RBI the space to cut.

3. Financialisation of savings will accelerate as both property and gold will now be challenged as alternate stores of value. The cost of capital will reset downwards for the country.

4. There will be a significant negative wealth effect. Some percentage of this ₹ 15 lakh crore will get wiped out. Black money that is either simply burned, or loses 30-40 per cent as the cost of conversion to legitimate money. Wealth destruction is also inevitable in property, as prices fall and markets freeze. There will be a shock to high end-discretionary consumption.

5. There is likely to be some behavioural change as those parts of the economy relying on cash need to adjust. Individuals and business that were using large chunks of cash on a daily basis will take months to rebuild these cash levels given the limits on daily withdrawals. In the interim, they will have to adopt e-payments or cheques to stay in business. As their business moves into the formal economy, it will be difficult to reverse and the tax buoyancy of economic growth will improve for the government.

6. For the vast majority of Indians, those having less than ₹ 2.5 lakh in cash or agriculturalists, things will normalise in a few weeks. They will simply need to wait till they can get the new notes. For these people, it is largely a logistical issue of note replacement.

7. Small and medium-sized enterprises (SMEs) will be in trouble. Many are doing business entirely in cash. Demonetisation, combined with goods and services tax (GST), will kill their business model, which was dependent on tax and labour arbitrage. Many sectors will see large market share gain for the organised players. Lenders to the unorganised sector will need to stress test their exposures; there may be far greater credit issues here than investors are modelling.

8. Expect more measures to tackle the flow (fresh creation) of black money. Demonetisation handles the stock problem. Once the short-term logistics around cash replacement are fixed, expect new restrictions on use of cash and continued curbs on cash withdrawals. These steps will continue to force behavioural change.

9. I am frankly quite amazed as to the extent of cash in the system and its all pervasiveness. It seems that there is no supply chain untouched, and even large organised players need to deal with cash. There are many segments of the economy which operate only on cash. Whether demonetisation works or not, we have to attack this cash and the mindset. That much is certain.

–wrote Akash Prakash

The impairments and write downs at Tata Sons were due to legacy issues, largely relating to TTSL.

There were also other investments of questionable nature such as Nagarjuna refineries (Rs. 400 Cr.) and SASOL JV.

One investment in Piaggio Aero, a company in the aerospace sector with a friend of Mr. Tata, was especially distressing. Tata Sons decided to exit the company at a commercial loss of Rs 1,150 Cr. This was after the efforts of Mr. Bharat Vasani and Mr. Farokh Subedar who managed to recover Rs. 1,500 Cr., overcoming the objections of Mr. Ratan Tata who in contrast favoured increasing investments in that company.

Today, the company is, for all practical purposes, nearly bankrupt. 

–from ET

In his Alternate Universe, Ratan Tata wants Regulators/Stock Exchanges should question/take clarifications from individuals and not listed companies:

Here, we are only referring to the shocking statement of Cyrus Mistry of five or six major Tata companies having to take ‘potential write-downs of $18 billion’ in future in their assets/investments and the following points/queries need to be raised –

a) Has Mr Mistry, the Chairman, informed the Boards of these companies at any time in the past specifically of the above mentioned potential write-downs? If so, when was this done and why was itnot made public as this is clearly a major item of information – apart from disclosing only the write-offs required to be  made to date. Surely he could not have ‘discovered’ such a large potential liability only a day  or two after he was replaced as the  Chairman of Tata Sons. Therefore, he must have been aware of this potential large provision much earlier but did not disclose it. It presumably relates to possible future provisions to be made (with no firm basis) but only his own expectation, i.e. a forward-looking statement which is normally not permissible due to its uncertainty. It also suggests that  he had no intention of or given up any attempt to revive the value of these companies. It is unfortunate that  the  BSE/NSE have  asked the   companies to explain this statement and not Mr Mistry as the author of this statement.

b) On the same point, it has been widely reported that  this statement of potential write-downs of this magnitude has been largely responsible for the loss in the total market value of these five or six companies of an amount of over Rs 25,000 crore and all the shareholders would naturally be unhappy at this loss in their own value for no fault of theirs but mainly due to this shocking and sudden statement on the part of the Chairman of these companies which may or may not have been shared with the Board and certainly not publicly disclosed earlier. Here again, it is unfortunate that the shareholders and regulatory authorities would put the onus on the companies and not  Mr Mistry as the author of the statement for being responsible for this large loss in market value.

-from Full Statement of Tata Sons