News Flashes

TRAI to push tax breaks for ISPs

20 April 2004: The Telecom Regulatory Authority of India is on the verge of recommending variety of opportunities to Internet Service Providers (ISPs) in order to promote internet and broadband services. A five- year service tax holiday is on top of the list while waiver of the entertainment tax on broadband subscription, removal of anti-dumping duty on recycled personal computers imported into India and 50 per cent reduction in income tax for web-hosting services for five years follows. TRAI has set a target of 18 million Internet users and 9 million broadband connections by 2007. The country now has 4 million Internet users and 125,000 broadband connections. The following suggestions are also going to be presented to the government: Ø Spectrum charges for the use of broadband and Internet services may also be brought down from 4 per cent to 1 per cent Ø TRAI is also expected to suggest delicensing of the 2.4 GHz, 2.48 GHz and 5.85 GHz frequency band, which will enable proliferation of wireless broadband services through technologies like wi-fi and wi-max.Ø Tax benefits on donated PCs and 100 per cent depreciation in the first year on a computer. (At present, only 60 per cent depreciation is allowed).Ø A two per cent reduction in licence fees for very small aperture terminal (V-SAT) and direct-to-home (DTH) television operators.

RBI cuts interest rates on NRE deposits

19th April 2004: The Reserve Bank of India (RBI) cut the rate of interest on NRI deposits to slay arbitraging on interest rate difference between the US dollar and the Indian rupee and stalk the rise of rupee. This measure was announced after the central bank’s weekly data showed that the country’s foreign exchange reserves have gone up by $3.37 billion to $116.06 billion in the week ended April 9. The RBI said the interest rates on non-resident (external) rupee (NRE) deposits for one to three years from April 18 should not exceed the London Inter-bank offered rate (Libor)/Swap rates for the US dollar of equivalent maturity. Till now it was 25 basis points over Libor. Under the NRE scheme, deposits are received in foreign currency and converted into rupees, and converted back into foreign currency on maturity. The interest rates on NRE deposits were first linked to Libor/swap rates for the US dollar from July 17 last when the ceiling was fixed at 250 basis points. It was cut to 100 basis points on September 15 and was further lowered to 25 basis points above Libor/Swap rates on October 18. The fresh ceiling is effective from the close of business on April 17. The RBI also stated that rates offered on NRE savings deposits for expatriate Indians would not exceed the Libor/swap rates offered on the US dollar deposits with a six-month maturity. These deposits would now offer a return of just around 1.3 per cent compared with 3.5 per cent earlier. One year Libor is now gauged at around 1.6 per cent and six-month at 1.28 per cent.

Reliance Energy plans another overseas issue

17th April 2004: Reliance Energy is planning a second overseas equity issue and is looking at the option of floating an issue of American or global depository receipts or even a foreign currency convertible bond (FCCB). The board of Reliance Energy passed a resolution authorising the issue of 10 million new underlying shares. Reliance Energy (formerly BSES) had issued global depository receipts in 1995. This declaration comes at a time when the stake of foreign institutional investors stands at 20 per cent. Reliance Energy had raised around Rs 3,000 crores through a mix of instruments, including a zero-coupon convertible bond. Foreign institutional investors like Sloane and Capital International had picked up noteworthy stakes. The repeated rounds of capital infusion over the last three months has boosted Reliance Energy’s net worth to the Rs 6,500 crores. Reliance Energy has chalked out a Rs 20,000 crores investment plan over the next five years. It has earmarked around Rs 10,000 crores for the generation business, Rs 4,000 crores for transmission and Rs 6,000 crores for distribution.

RBI might allow banks to trade in derivatives

10th April 2004: The Reserve Bank of India (RBI) is considering ways of allowing banks to trade in equity derivatives and commodities, including commodity futures. According to sources, the RBI has proposed amendments to two key sections of the Banking Regulation Act to the government. The amendments will enable banks to trade in equity derivatives as well as commodities. Amendment to Section 6 of the Banking Regulation Act will deal with equity derivatives and changes to Section 8 will lead to the commodities market being opened to banks. Banks would be able to trade in commodities and commodity futures once the amendments are made. These amendments could be expected only after the new government is set up at the Centre. Presently, banks can invest up to 5 per cent of their net demand and time liabilities in the equity market. Banks are neither allowed to trade in equity market derivatives nor in commodities as per the current norms. Even if some banks are active in fixed-income derivatives, the contract notes entered into between players in the derivatives market have no legal sanctity and this has been one of the reasons why public sector banks have been keeping away from the derivatives market. Banks are now able to participate only in exchange-traded derivatives, with a legal cover due to the passing of the Securities Contract Regulation Act. Banks have been allowed to get into over-the-counter derivatives such as currency options but the legal validity of the contract notes is unclear. Among commodities, banks are allowed to deal in gold. Banks can participate as trading members on the commodities exchanges if the proposed amendments come through.

RBI tautens norms for raising ECB

5th April 2004: The Reserve Bank of India (RBI) stated that external commercial borrowings (ECBs) cannot be used for working capital, general corporate purpose or repayment of existing rupee loans and that this will be applicable for borrowings raised after the revised ECB guidelines that were issued on January 31. The central bank also stated that residents, who can otherwise invest $25000 overseas under the liberalised remittance regime, could not use the offshore banking unit route. Eligible borrowers were permitted to raise ECB under the automatic route equivalent to $50m per financial year for general corporate purpose before February 1, 2004. The revised guidelines however allow annual borrowings up to half a billion dollars under the automatic route. Also the borrowers going for ECB after February 2004 are required to submit returns on a monthly basis certified by the designated Authorised Dealer (AD) to RBI within seven working days from the month-end of the borrowing. The central bank has said that the concerned borrower and the authorised dealer have the responsibility to ensure that ECB raised/utilised are in conformity with the Reserve Bank instructions. RBI has allowed authorised dealers to approve extension of repayment periods for ECBs under the former $5m scheme provided that there is a consent letter from the overseas lender for such rearrangement without any additional cost.

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