Insights Daily Current Affairs, 03 November 2018
Topic: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Companies Amendment (Ordinance), 2018
What to study?
For Prelims and Mains: Highlights of the amendment and key features of the Companies Act.
Context: The President has given his assent to the Companies Amendment (Ordinance), 2018. The Ordinance is promulgated to review offences under the Companies Act, 2013.
- Shifting of the jurisdiction of 16 types of corporate offences from the special courts to in-house adjudication, which is expected to reduce the case load of Special Courts by over 60%, thereby enabling them to concentrate on serious corporate offences.
- The penalty has been reduced to half for small companies and one person companies of that applicable to normal companies.
- Instituting a transparent and technology driven in-house adjudication mechanism on an online platform and publication of the orders on the website.
- Strengthening in-house adjudication mechanism by necessitating a concomitant order for making good the default at the time of levying penalty, to achieve the ultimate aim of achieving better compliance.
- Declogging the NCLT by enlarging the pecuniary jurisdiction of Regional Director, vesting in the Central Government the power to approve the alteration in the financial year of a company and vesting the Central Government the power to approve cases of conversion of public companies into private companies.
Topic: Development processes and the development industry the role of NGOs, SHGs, various groups and associations, donors, charities, institutional and other stakeholders.
Partial credit enhancement (PCE)
What to study?
For Prelims and Mains: Meaning, features and significance of PCE and NBFCs.
Context: The Reserve Bank of India (RBI) has allowed banks to provide partial credit enhancement (PCE) to bonds issued by systemically important non-deposit taking non-banking financial companies (NBFCs) registered with the RBI and housing finance companies (HFCs) registered with the National Housing Bank.
- The move is aimed at enhancing the credit rating of the bonds and enabling these NBFCs to access funds from the bond market on better terms.
- PCE is expected to help NBFCs and HFCs raise money from insurance and provident or pension funds who invest only in highly-rated instruments.
- The tenure of these bonds shall not be less than three years and proceeds from them shall only be utilized to refinance existing debt.
- Banks shall introduce appropriate mechanisms to monitor and ensure that the end-use condition is met.
- The central bank has restricted the exposure of a bank through PCEs to bonds issued by each such NBFC or HFC to 1% of capital funds of the bank within the current single and group borrower exposure limits.
- Banks are allowed to provide PCE as non-funded subordinated facility in the form of a contingent line of credit to be used in case of shortfall in cash flows for servicing the bonds and thereby improve the credit rating of the bond issue.
The incentive comes at a time when NBFCs and HFCs have requested the government and regulators to ensure that confidence returns to the market. They have sought relaxations of the National Housing Bank’s credit rating norms related to refinance, lowering of the criterion on years of existence to one year, providing for 10% of the loan loss by the government and capital infusion in banks.
What is credit enhancement?
Credit enhancement means improving the credit rating of a corporate bond. For example, if a bond is rated BBB, credit enhancement, which is basically an assurance of repayment by another entity, can improve the rating to AA. This is done to provide an additional source of assurance or guarantee to service the bond.
RBI has now allowed banks to provide credit enhancement up to 20% of the total bond issue. This means banks (one or many together) can assure repayment of dues related to a bond issue up to 20% of the value. Other than banks, organisations such as India Infrastructure Finance Co. Ltd also provide this facility.
BENEFITS FOR THE ISSUER:
Typically, bonds issued by subsidiaries or special purpose vehicles (SPVs) of infrastructure companies seek enhancement. Since the projects take a long time to become operational and generate money, along with the risk of implementation, often their formal credit rating is not very high. Through the credit enhancement facility, the existing rating can be improved at an early stage, which enables the issuer to raise funds at a relatively lower yield. Higher the credit rating, lower is the cost of raising funds.
Since these bonds are long-term in nature, they appeal to institutional investors like pension funds and insurers. However, these investors, especially pension funds, invest mostly in investment grade securities which are at least AA-rated. Credit enhancement makes the bonds more attractive by improving the rating enough so that institutional investors become interested in adding these to their portfolios.
BENEFIT FOR THE INVESTOR:
For the investor, the facility provides a sort of insurance in case of hard times. Basically, the credit enhancement gets used only when there is a shortfall in either paying interest or repaying principal. Hence, investors are more secure about repayment even if there is uncertainty regarding cash flows for some time.
BENEFITS FOR THE BOND MARKET:
The bond market will benefit as more issues get placed, which will help in developing the secondary market. This is useful in giving investors an early exit route, and in adding stability to secondary market transactions in long-term corporate bonds. At present, however, there is not much trading happening in long-term corporate bonds from infrastructure companies in the secondary market.
Sources: the hindu.
Topic: Important International institutions, agencies and fora, their structure, mandate.
Society for worldwide interbank financial telecommunication
What to study?
- For Prelims: About SWIFT, its composition and functions.
- For Mains: Implications of sanctions by US on Iran.
Context: The Head of the US Treasury Steven Mnuchin has announced that Washington wants the world-wide payment network to cut off its services to the entities that were affected by Iran sanctions and warned that otherwise SWIFT might be sanctioned as well.
The US will reintroduce sanctions against Tehran that were earlier lifted under the Iran nuclear deal, on November 5. These sanctions will affect the country’s energy, banking, and shipping sectors.
What is SWIFT?
The SWIFT is a global member-owned cooperative that is headquartered in Brussels, Belgium. It was founded in 1973 by a group of 239 banks from 15 countries which formed a co-operative utility to develop a secure electronic messaging service and common standards to facilitate cross-border payments. It carries an average of approximately 26 million financial messages each day. In order to use its messaging services, customers need to connect to the SWIFT environment.
- SWIFT does not facilitate funds transfer: rather, it sends payment orders, which must be settled by correspondent accounts that the institutions have with each other.
- The SWIFT is a secure financial message carrier — in other words, it transports messages from one bank to its intended bank recipient.
- Its core role is to provide a secure transmission channel so that Bank A knows that its message to Bank B goes to Bank B and no one else. Bank B, in turn, knows that Bank A, and no one other than Bank A, sent, read or altered the message en route. Banks, of course, need to have checks in place before actually sending messages.
Significance of SWIFT:
Messages sent by SWIFT’s customers are authenticated using its specialised security and identification technology. Encryption is added as the messages leave the customer environment and enter the SWIFT Environment. Messages remain in the protected SWIFT environment, subject to all its confidentiality and integrity commitments, throughout the transmission process while they are transmitted to the operating centres (OPCs) where they are processed — until they are safely delivered to the receiver.
Sources: the hindu.
Topic: types of irrigation and irrigation systems storage.
Turga Pumped Storage
What to study?
For Prelims and Mains: Location, significance and key features of the project.
Context: A Loan Agreement was recently signed between India and Japan on Japanese Official Development Assistance loan for the construction of Turga Pumped Storage (I) of Yen 29.442 Billion (Rs. 1817 crore approximately).
About Turga Pumped Storage project:
- The Turga Pumped Storage Project on Turga nala is a closed loop type Pumped Storage Project located in Purulia district of West Bengal.
- The Turga Pumped Storage Project envisages utilization of rainfall in the catchment of the Turga Nala in Ayodhya hills for peak power generation for a Pumped Storage type project development.
- The project envisages construction of Upper Dam across Turga Nala, a tributary of Subarnarekha river and a water conductor system with an underground Power House on the downstream of Upper Dam and a Lower Dam having intermediate catchment of 4.37 sq. km.
- The objective of the Project is to strengthen the capability to respond to fluctuation in supply and demand of power and to improve stability of the power supply by constructing the pumped storage facilities, thereby contributing to the Industrial Development and Living Standard Improvement in the State of West Bengal.
India and Japan have had a long and fruitful history of bilateral development cooperation since 1958.In the last few years, the economic cooperation between India and Japan has steadily progressed. This further consolidates and strengthens the Strategic and Global Partnership between India and Japan.
Topic: Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
Support Initiatives for MSME Sector
What to study?
- For Prelims: Meaning and classification of MSMEs.
- For Mains: Need and significance of the new initiatives launched, challenges faced by the MSMEs.
Context: The government has launched a historic support and outreach programme for the Micro, Small and Medium Enterprises (MSME) sector. As part of this programme, the Prime Minister of India recently unveiled 12 key initiatives which will help the growth, expansion and facilitation of MSMEs across the country.
There are five key aspects for facilitating the MSME sector. These include access to credit, access to market, technology upgradation, ease of doing business, and a sense of security for employees. The 12 initiatives will address each of these five categories.
The 12 initiatives include:
- 59 minute loan portal to enable easy access to credit for MSMEs. Loans upto Rs. 1 crore can be granted in-principle approval through this portal, in just 59 minutes.
- A 2% interest subvention for all GST registered MSMEs, on fresh or incremental loans. For exporters who receive loans in the pre-shipment and post-shipment period, there will be an increase in interest rebate from 3% to 5%.
- All companies with a turnover more than Rs. 500 crore, must now compulsorily be brought on the Trade Receivables e-Discounting System (TReDS). Joining this portal will enable entrepreneurs to access credit from banks, based on their upcoming receivables. This will resolve their problems of cash cycle.
- Public sector companies have now been asked to compulsorily procure 25%, instead of 20% of their total purchases, from MSMEs.
- Out of the 25% procurement mandated from MSMEs, 3% must now be reserved for women entrepreneurs.
- All public sector undertakings of the Union Government must now compulsorily be a part of GeM. He said they should also get all their vendors registered on GeM.
- 20 hubs will be formed across the country, and 100 spokes in the form of tool rooms will be established.
- Clusters will be formed of pharma MSMEs. 70% cost of establishing these clusters will be borne by the Union Government.
- The return under 8 labour laws and 10 Union regulations must now be filed only once a year.
- Now the establishments to be visited by an Inspector will be decided through a computerised random allotment.
- Under air pollution and water pollution laws, now both these have been merged as a single consent. The return will be accepted through self-certification.
- An Ordinance has been brought, under which, for minor violations under the Companies Act, the entrepreneur will no longer have to approach the Courts, but can correct them through simple procedures.
Significance of MSMEs:
Micro-, Small and Medium-sized Enterprises are the backbone of most economies worldwide and play a key role in developing countries.
- According to the data provided by the International Council for Small Business (ICSB), formal and informal Micro-, Small and Medium-sized Enterprises (MSMEs) make up over 90% of all firms and account on average for 60-70% of total employment and 50% of GDP.
- These types of enterprises are responsible for significant employment and income generation opportunities across the world and have been identified as a major driver of poverty alleviation and development.
- MSMEs tend to employ a larger share of the vulnerable sectors of the workforce, such as women, youth, and people from poorer households. MSMEs can even sometimes be the only source of employment in rural areas. As such, MSMEs as a group are the main income provider for the income distribution at the “base of the pyramid”.
Topic: Awareness in space.
NASA’s Orion spacecraft
What to study?
For Prelims and Mains: All about the Orion Spacecraft and the Mission.
Context: Europe’s Airbus has delivered the “powerhouse” for NASA’s new Orion Spaceship that will take astronauts to the Moon and beyond in coming years, hitting a key milestone that should lead to hundreds of millions of euros in future orders.
- Airbus’s European Service Module will provide propulsion, power, thermal control and consumables to the Orion crew module, marking the first time that NASA will use a European-built system as a critical element to power an American spacecraft.
NASA’s Orion spacecraft is built to take humans farther than they’ve ever gone before.
- Orion will serve as the exploration vehicle that will carry the crew to space, provide emergency abort capability, sustain the crew during the space travel, and provide safe re-entry from deep space return velocities. Orion will launch on NASA’s new heavy-lift rocket, the Space Launch System.
- Orion will first fly with astronauts aboard during Exploration Mission-2, a mission that will venture near the Moon and farther from Earth than ever before, launching atop NASA’s Space Launch System rocket — which will be the world’s most powerful rocket.
Sources: the hindu.
Facts for Prelims:
Dharma Guardian 2018:
- What is it? It is a joint military exercise between India and Japan.
- Why in News? The first edition of this joint military exercise is being held in Mizoram.
- Aim: The exercise is aimed at developing mutual understanding and respect between militaries of both countries, as also facilitate in tracking worldwide phenomenon of terrorism.