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According to the Petroleum Minister

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According to the Petroleum Minister:

The higher gas price would help in increasing the production over 3 trillion cubic feet (tcf) of gas reserves, which had been declared economically unviable at the current price of $4.2 per mBtu.

Several gas discoveries of firms such as Oil and Natural Gas Corporation (ONGC) and RIL had been declared unviable by the Directorate General of Hydrocarbons (DGH) as the current gas price of $4.2 per mBtu was inadequate to cover the cost of production. “The option before the country is to either keep the gas finds under wraps and continue importing gas at $12-13 or pay much lesser than this price to domestic producers to bring the discoveries to production and cut foreign exchange outgo on imports. India might also end up importing 100 % if exploration is not encouraged.

The new price from April, 2013 would apply to all public and private producers of conventional gas and non-conventional fuel like coal-bed methane and shale gas.


  • Importance of Domestic resource mobilization?

  • Some externalities while extracting coal like its effect on environment, health etc.

  • What impact would it have on the stakeholders (producers, end-consumers, government) and the country’s economy with the increase in the price of the natural gas?

  • What are conventional and non-conventional fuels available in India? How best has India used its resources? Suggestions for making the optimum use of these resources.

Finance Ministry backs cap on gas prices

In the backdrop of a draft Cabinet note floated by the Petroleum Ministry to allow Reliance Industries Limited (RIL) to charge higher prices and furnish bank guarantee for the shortfall in the KG D6 gas production till it is verified by independent experts, the Finance Ministry has strongly pitched for putting a cap on the prices of natural gas, likely to come into effect from April 1, 2014, under the new pricing policy.

Issue with Gas pricing:

The Finance Ministry has said that it was important to put a ceiling on the gas price to protect the interests of both the government and the consumers in case there is an unreasonable increase in the gas prices. On similar lines, the Fertilizer and Power Ministries had already warned that, this could lead to a much higher outgo of subsidy.

The Cabinet had, in June, 2013 approved the Rangarajan formula for gas pricing to be made effective for five years from April, 2014, with a provision for a quarterly provision.

The new formula has yet not been notified, as the Finance Ministry had wanted that RIL should be denied the higher gas prices from its existing fields because output had fallen far below what was committed in the approved development plan. Initially, the Petroleum Ministry agreed with the Finance Ministry’s opinion but then recently it has moved a revised note, suggesting that RIL be asked to give bank guarantee which can be encashed if it was proven that the company had hoarded gas by deliberately keeping output low.

On the positive side, the ceiling would take care of the interest of the gas producers as a downswing in international market may adversely impact their financial fortunes and a ceiling would provide them a much desired stability.

Mind –Mapping:

  • What was the basis of Rangarajan’s formula on ‘gas pricing’? On what basis are the international pricing of the gas done? How is it done in India?

  • What is the issue with the Gas pricing? Why is the cap proposed? How would this impact the Government, the producers and the end customers?

Panel seeks review of Rangarajan formula on gas pricing

The Standing Committee on Petroleum and Natural Gas has sought a review of the Rangarajan formula for gas pricing, saying that the price should be fixed after factoring in the domestic cost of production.

Recommendation of the Committee:

According to the committee, the proposed formula is a simple average of two methodologies-  price of imports of LNG into India by different suppliers and weighted average of prices of natural gas prevailing at Henry Hub in USA, National Balancing Point (NBP) in London and netback import price at the well head of suppliers into Japan. Also the benefit of lower gas price at Henry Hub has been largely diluted by the inclusion of Japan’s liquefied natural gas prices, which includes 60%  royalty component linkage to Japanese Crude Cocktail and host of other factors.

The panel, headed by Andhra Pradesh MP Aruna Kumar Vundavalli, was of the view that Russia, which exports 40 to 50 % of its gas to Europe at a price of about $8.77 per mBtu, could be a better indicator of gas price. Russia is the world’s second largest gas producer and consuming country in the world and its prices could be incorporated as one of the reference price in the pricing formula.

The committee also pointed at omission of domestic cost of production of natural gas, which ranges from $2.48 to $3.63 for private and public sector firms, in the formula.The committee has recommended factoring domestic cost of production of gas for arriving at the price, and fixation of price of gas in rupee terms.

According to the Rangarjan pricing formula, the price will be revised quarterly. Prices for each quarter will be calculated based on the 12-month trailing average price with a lag of one quarter (i.e. price for April to June 2014 will be calculated based on the average for 12 months ended December 31, 2013). Using the approved formula, gas price in April-June (2014) is estimated at $8.2-8.4, nearly double the current selling price of $4.20.

Policy on disposing surplus coal

A three-member panel, headed by Planning Commission (PC) member B.K. Chaturvedi, has said that the captive coal mining players should not be allowed to transfer surplus coal outside the end-use sector which they had been allocated for, and any surplus coal with them should be transferred to either the nearest Coal India Ltd. (CIL) subsidiary or other firms in the same sector facing shortage of coal in linkage coal from CIL.

And regarding ‘coal banking system’ (The coal banking proposal will allow companies to transfer coal to another company, where the end-use project has been commissioned before the coal block, and receive the coal at a later stage) CIL has expressed its reluctant to be a part of any coal-banking arrangement.

The Power Ministry had conveyed to the committee as well as the Planning Commission that any coal banking system should not lead to profiteering among coal block holders. The government had allocated a total of 218 captive blocks to companies between 1993 and 2011.

Of these, 47 blocks have been de-allocated. Captive coal-mining companies were expected to produce 100 tonnes by the end of the last five-year Plan period in March 2012.

However, production from captive coal mines has remained stagnant at 30-36 million tonnes over the past four years, giving rise to coal availability crisis. During the same period, CIL’s production has grown by 4.8% to 452 million tonnes.

Related information:

Under the Coal Mine Nationalization Act (1973), Coal Mining was exclusively reserved for public sector. Subsequent amendments & notifications allowed select end user industries to engage in captive coal mining- Iron & Steel Industries, Power generation, Cement Production.Two modes of dispensation –

Captive dispensation: For a specified end-use to both Private & Govt. companies

Govt. dispensation: No end use restriction but only to Govt. companies

Since 1993, a total of 198 coal blocks have been awarded to various private & Govt. companies of which 128 have been through Captive Dispensation and the rest through Govt. dispensation route.

However, only a handful of these mines are under commercial operation

CICs can raise funds via ECB

The RBI has allowed holding companies or core investment companies (CICs) to raise funds through external commercial borrowings (ECB) for project use in special purpose vehicles (SPVs) involved in infrastructure sector.

The ECB proceeds would be utilized either for fresh capital expenditure (capex) or for refinancing of existing rupee loans availed of from the domestic banking system for capex.

However, the RBI said that an earlier  stipulation that maximum 25% of ECB raised by the infrastructure companies can be utilised for refinancing of the rupee loans availed from the domestic banking system (40%  in case of power sector) would remain unchanged.

The ECB for SPV can be raised up to 3 years after the commercial operations date of the SPV and the SPV should give an undertaking that no other method of funding will be utilized for that portion of fresh capital expenditure financed through ECB proceeds.

What do you mean by external commercial borrowings (ECB)?

An external commercial borrowing (ECB) is an instrument used in India to facilitate the access to foreign money by Indian corporations and PSUs (public sector undertakings).

 ECBs include commercial bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of multilateral financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

ECBs cannot be used for investment in stock market or speculation in real estate.

The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along with Reserve Bank of India, monitors and regulates ECB guidelines and policies.

 For infrastructure and greenfield projects, funding up to 50% (through ECB) is allowed. In telecom sector too, up to 50% funding through ECBs is allowed.

Borrowers can use 25% of the ECB to repay rupee debt and the remaining 75% should be used for new projects. A borrower cannot refinance its existing rupee loan through ECB. The money raised through ECB is cheaper given near-zero interest rates in the US and Europe, Indian companies can repay their existing expensive loans from that.

What do you mean by a holding company?

A holding company is a company or firm that owns other companies’ outstanding stock. The term usually refers to a company that does not produce goods or services itself; rather, its purpose is to own shares of other companies.

Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies. In the United States, 80% or more of stock, in voting and value, must be owned before tax consolidation benefits such as tax-free dividends can be claimed.

Courtesy – Wikipedia

What are core investment companies (CICs)?

Core Investment Companies, (CIC) are those companies which have their assets predominantly as investments in shares for holding stake in group companies but not for trading, and also do not carry on any other financial activity.

These companies a minimum 90% of their assets in the group concerns either in the form of equity, preference shares or convertibles bonds or loans. Further the component of equity holdings should not be less than 60% of their assets.

RBI has now recognized that such CICs justifiably deserve a differential treatment in the regulatory prescription applicable to Non-Banking Financial Companies which are non-deposit taking and systemically important.

 It is now decided by RBI that only those CICs having an asset size of Rs.100 crore and above would be treated as systemically important core investment companies.

Courtesy –

RBI allows interest rate futures on smaller tenors

The RBI would introduce cash-settled interest rate futures on 10-year government bonds, and has also permitted exchanges to launch these derivatives in other smaller tenor securities in the future.

The RBI had twice attempted to launch the interest rate futures (IRFs), in 2003 and 2009, but both attempts failed largely due to what participants called faulty product design.

Market participants were keen on cash-settled futures rather than a physical delivery, which requires financial firms to deliver an actual security to the investor, as was the case in 2009.

The move has been hailed as bold and progressive.

What do you mean by cash-settled interest rate futures?

Cash Settlement is a method of settling forward contracts or futures contracts by cash rather than by physical delivery of the underlying asset. The parties settle by paying/receiving the loss/gain related to the contract in cash when the contract expires.

In forward or future contracts, the buyer agrees to purchase some asset in the future at a price agreed upon today. In physically settled forward and future contracts, the full purchase price is paid by the buyer, and the actual asset is delivered by the seller.

For example: Company A enters into a forward contract to buy 1 million barrels of oil at $70/barrel from company B on a future date. On that future date, Company A would have to pay $70 million to company B and in exchange receive 1 million barrels of oil.

However, if the contract was cash-settled, the buyer and the seller would simply exchange the difference in the associated cash positions.

cash-settled interest rate futures” in simple terms (by our active participant)

A future contract is one where a buyer and a seller enters into an agreement.
2. The agreement is that, the buyer will buy the commodity from the seller at a future date. However, when making the agreement, they agree for the a particular price of the commodity, which will be applicable to a future date.
3. So, if A and B enter into a future agreement of 3 months, for 10 barrels of crude oil at $75 per barrel, then A will buy from B 10 barrel of oil at $75 per barrel after 3 months. The price prevailing in the market after 3 months will not matter. So, if the prices are increased and reaches $100 per barrel after 3 months, A has made a profit of $25 per barrel (as he entered into agreement at $75 per barrel), however if the prices crash to $25/barrel, A incurred a loss of $25 per barrel. This is futures as far as I know.

Now coming to “cash-settled interest rate futures”
Here buyer and seller will enter into an agreement to buy an interest bearing asset, on a future date. Here the asset will be government securities or the bonds issued by the government.

Now what is cash settlement:
This means that on the future date when the deal is to be executed, only the difference in price will be transacted and not the actual asset. So, there will not by any trade of securities, but only the difference in the contract price and current market value of the security.
[From our crude oil example, it will mean that on the delivery date, only the difference in crude prices will be transacted and not the actual crude oil]

Challenges to the Banking Sector

The annual report on “Trend and Progress of Banking in India’’ is w.r.t the terms of the Banking Regulation Act 1949. The report is an authentic account of the developments in the financial sector.

Banks dominate the financial sector, accounting for over half of the financial flows in the economy.

The principal challenges facing banks:

The domestic economy is slowing down while at the global level there is only a modest recovery. Regulatory initiatives over the past year sought to enhance the quality of risk-based supervision, better oversight over financial conglomerates and improved coordination among regulators. Banks are being equipped to face the challenges of financial inclusion.

More specifically, banks need to address certain key issues. Reduction in the level of NPAs (non-performing assets) is a primary task. Simultaneously loan recovery methods have to be improved upon and strengthened. Financial inclusion should be implemented in a sustainable way. For this suitable business and delivery models will have to be developed. The asset quality of banks has decreased significantly. Credit appraisal and post-loan monitoring are other crucial steps which need to be improved upon.

Competition among banks and with the rest of the financial sector will increase. New banks are proposed to be licensed shortly. There is a need for decisive changes in the banking structure to enable it to grow in size, resources efficiency and inclusivity. Two important recent developments here are the licensing of new private banks and announcing clear guidelines for foreign banks to set up shop in India or expand their footprint in India. Though awarding licences to corporate houses (among others) remains a highly controversial idea.

Another area which will engage policy makers to a greater extent than now is strengthening the role of banks in inclusive development. Access to bank finance is still poor for many categories. They include the poor, rural and small and medium industries. Although recently a very large number of bank accounts have been opened, the actual number of transactions per account is still small, suggesting inadequacies on both demand and supply sides.

Financial literacy will create awareness of bank schemes and thereby enhance the access to the financial system. Increased use of technology would help in achieving the goal of financial inclusion.

Mauritius, India agree to ‘LoB’ clause

Mauritius has agreed to include a ‘limitation of benefits (LoB)’ clause in its revised tax treaty with India.

While specific details of this clause in the India-Mauritius tax treaty are being ironed out, LoB clauses are typically aimed at preventing ‘treaty shopping’ or inappropriate use of tax pacts by third-country investors.

The LoB clause limits treaty benefits to those who meet certain conditions, including those related to business, residency and investment commitments of the entity seeking benefit of a Double Taxation Avoidance Agreement (DTAA).

RBI governor blames domestic factors for economic woes

Attributing the current economic woes to stimulus provided by the government to tide over the global crisis of 2008, RBI Governor Raghuram Rajan has said it eventually led to an overheated economy, high inflation and uncomfortable fiscal and current account deficits.

According to the RBI governor the economy had slowed to below 5% from an average of 8% during 2002-12, mainly on account of domestic factors.

The slowdown was largely a result of domestic factors (institutional weakness, withdrawal of stimulus) and one-third due to global factors.

While the stimulus did help growth initially, it eventually led to an over-heated economy, high inflation/wage growth and consequently deficits widening to uncomfortable highs.

(The then Finance Minister, Pranab Mukherjee, gave three stimulus packages to industry to combat the impact of global financial meltdown of 2008)

What do you mean by ‘Overheated Economy’?

When a prolonged period of good economic growth and activity causes high levels of inflation (from increased consumer wealth) and inefficient supply allocations as producers overproduce and create excess production capacity in an attempt to capitalize on the high levels of wealth. Unfortunately, these inefficiencies and inflation will eventually hinder the economy’s growth and cause a recession.

Rising rates of inflation are typically one of the first signs that an economy is overheating. As a result, governments and central banks will usually raise interest rates in an attempt to lower the amount of spending and borrowing.

CERC draft sets tougher norms for producers

The Central Electricity Regulatory Commission (CERC),has announced draft tariff criteria for the power sector for 2014-19, which is likely to impact companies such as NTPC, Sutlej JalVidyut Nigam and NHPC.

Draft Tariff criteria for the power sector for 2014-19:

According to this draft, power tariffs will fall as the CERC has proposed to remove the tax arbitrage, which existed when companies such as NTPC charged a higher tax rate from its customers.

The CERC has also changed the norms for operating and maintenance (O&M) expenses marginally, which, according to analysts, is set to increase, bringing in relief for power generation companies.

Another highlight of the draft is the proposed tightening of operating norms for power producing and transmission companies by shifting incentives to their plant load factor (PLF) from the plant available factor (PAF). This will link incentives to actual power generated and the PLF, that is, the capacity at which the plant is operating. While private companies have been given permission to raise tariffs, the proposed change would affect state-run producers such as NTPC, whose existing incentives are linked to their available capacity for the State electricity boards (SEBs).

Thus, even if the NTPC’s plants could not generate the required power for lack of coal, it is still able to avail itself of the benefits. PLFs of most power generators have fallen below 70% in recent times owing to coal availability issues. The final regulations will be prepared in early 2014, after getting the relevant industry feedback.

With regard to the above guidelines, NTPC has asserted that, it generates 27% of electricity in the country with 18% of the installed capacity. The company has been rated as number one company in the world in terms of capacity utilisation, and the revenue that it earns is because of the efficiency, experience, strength of specialised manpower and corporate and financial management. Very stringent regulatory norms will further deteriorate the financial health of the state sector generators.

SEBI panel prescribes stricter norms on insider trading

The Securities and Exchange Board of India(SEBI) panel, headed by former chief justice of India N. K. Sodhi, has suggested that trades by promoters, employees, directors and their immediate relatives would need to be disclosed internally to the company.

The panel on insider trading also recommended that trades within a calendar quarter of a value beyond Rs. 10 lakh (or such other amount as the capital market regulator may specify) would be required to be disclosed to the stock exchanges.

Code of fair disclosure

Every entity that has issued securities which are listed on a stock exchange or which are intended to be listed would be required to formulate and publish a code of fair disclosure governing disclosure of events and circumstances that would impact price discovery of its securities.

The Committee has also suggested that each regulatory provision may be backed by a note on legislative intent.

While enlarging the definition of “insider”, the term “connected person” has been defined more clearly and immediate relatives are presumed to be connected persons, with a right to rebut the presumption. The term “immediate relative” would cover close relatives who are either financially dependent or consult an insider in connection with trading in securities.

Clarity on UPSI

Further the regulations would bring greater clarity on what constitutes “unpublished price sensitive information” (UPSI) by defining what constitutes “generally available information”, essentially, information to which non-discriminatory public access would be available. A list of types of information that may ordinarily be regarded as price sensitive information has also been provided.

Insiders would be prohibited from communicating, providing or allowing access to UPSI unless required for discharge of duties or for compliance with law.

Insiders, who are liable to possess UPSI all round the year, would have the option to formulate pre-scheduled trading plans. In such cases, the new UPSI that may come into their possession without having been with them when formulating the plan would not impede their ability to trade.

The Committee suggested that every listed company and market intermediary is required to formulate a Code of Conduct to regulate, monitor and report trading in securities by its employees and other connected persons.

Companies would be entitled to require third-party connected persons who are not employees to disclose their trading and holdings in securities of the company.

SAT sets aside SEBI order in Polaris insider trading case

The Securities Appellate Tribunal (SAT) has set aside an order passed by Securities and Exchange Board of India (SEBI) on October 9, 2012, holding Arun Jain, Chairman of Polaris Financial Technology, guilty of insider trading.

The SEBI order had also banned Mr. Jain from the stock market, and prohibited him from dealing with shares for two years.

The insider trading case, involving 15,080 Polaris shares dated back to 2000 when Polaris, after due diligence, called off the proposed acquisition of Data Inc of the U.S. in the 2nd week of September, 2000, but had belatedly informed the stock exchanges on September 30, 2000.

When the company disclosed the above information to the stock exchanges, there was a decline in the price of its shares. From Rs.545 on September 29, to as low as Rs.390 on October 23, 2000.

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