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Money Market/ Capital Market/Insurance

Indian Financial Market Capital Market Insurance Industry – Insurance Industry and Reforms

Money Market

A financial market is a broad term describing any marketplace where buyers and sellersparticipate in the trade of assets such as equities, bonds, currencies and derivatives.
Financial markets are typically defined by having –
• Transparent pricing
• Basic regulations on trading, costs and fees
• Market forces determining the prices of securities that trade.
Functions of financial Markets
1. Mobilization of saving & channelize them into more productive uses
2. Facilitate price discovery
3. Provide liquidity to financial assets
4. Reduces the cost of transaction & save time & efforts

A financial market consists of two major segments:

1. Money Market – the money market deals in short-term credit
2. Capital Market – the capital market handles the medium term and long-term credit

The money market is that part of a financial market which deals in the borrowing and lending of short term loans generally for a period of less than or equal to 365 days. It meets the short term requirements of borrowers and provides liquidity or cash to the lenders.
• It is a place where short term surplus investible funds at the disposal of financial institutions and individuals are bid by borrowers, again comprising institutions and individuals and also by the government.
• The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The Reserve Bank of India is the leader of the money market in India.
• Money market does not refer to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers.
• It should be noted that money market does not deal in cash or money but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money.
• Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market.
Structure of Indian Money Market
Indian money market is characterized by two sectors –
• Organized sector- The organized sector is within the direct purview of RBI regulations.
• Unorganized sector – The unorganized sector consists of indigenous bankers, money lenders, non-banking financial institutions, etc.
Major functions of money market
1. To maintain monetary equilibrium – It means to keep a balance between the demand for and supply of money for short term monetary transactions.
2. To promote economic growth – Money market can do this by making funds available to various units in the economy such as agriculture, small scale industries, etc.
3. To provide help to Trade and Industry – Money market provides adequate finance to trade and industry. Similarly, it also provides facility of discounting bills of exchange for trade and industry.
4. To help in implementing Monetary Policy – It provides a mechanism for an effective implementation of the monetary policy.
5. Money market provides non-inflationary sources of finance to government. It is possible by issuing treasury bills in order to raise short loans.
Instruments of Money Market
• Call Money
a. Call money is mainly used by the banks to meet their temporary requirement of cash. It is also known as money at call and money at short notice.
b. In this, market money is demanded for an extremely short period. The duration of such transactions is from a few hours to 14 days. These transactions help stock brokers and dealers to fulfill their financial requirements. The rate at which money is made available is called as call rate. Rate is fixed by the market forces such as the demand for and supply of money.
• Treasury Bill
a. It is a market for sale and purchase of short-term government securities.
b. These securities are called as Treasury Bills, which are promissory notes or financial bills issued by the RBI on behalf of the Government of India.
c. There are two types of treasury bills:
i. Ordinary or Regular Treasury Bills
ii. Ad Hoc Treasury Bills.
d. Treasury bills are highly liquid instruments. At any time the holder of treasury bills can transfer or get it discounted from RBI.
e. The maturity period of these securities range from as low as 14 days to as high as 364 days.
f. They have become very popular due to high level of safety involved in them.
• Cash Management Bills
a. The Government of India, in consultation with the RBI, decided to issue a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government.
b. The CMBs have the generic character of T-bills but are issued for maturities less than 91
• Certificate of Deposits (CDs)
a. The certificate of deposits is issued by the Commercial Banks
b. They are worth the value of Rs. 25 lakh and in multiple of Rs. 25 lakh
c. The minimum subscription of CDs should be worth Rs. 1 Crore.
d. The maturity period of CD is as low as 3 months and as high as 1 year.
e. These are the transferable investment instrument in a money market.
f. The government initiated a market of CDs in order to widen the range of instruments in the money market and to provide a higher flexibility to investors for investing their short term money.
• Commercial Papers (CPs)
a. Commercial paper (CP) is an investment instrument which can be issued by a listed company having working capital more than or equal to Rs. 5 cr.
b. The CPs can be issued in multiples of Rs. 25 Laths. However, the minimum subscription should at least be Rs. 1 cr.
c. The maturity period for the CP is a minimum of 3 months and maximum 6 months.
d. Commercial paper (CP) is a popular instrument for financing working capital requirements of companies.
e. It can be issued for period ranging from 15 days to one year. Commercial papers are transferable by endorsement and delivery.
• Repurchase Agreements
a. A repurchase agreement, also known as a repo, is the sale of securities together with an agreement for the seller to buy back the securities at a later date.
b. The repurchase price should be greater than the original sale price, the difference effectively representing interest, sometimes called the repo rate.
c. The party that originally buys the securities effectively acts as a lender. The original seller is effectively acting as a borrower, using their security as collateral for a secured cash loan at a fixed rate of interest
• Short Term Loan
a. It is a market where the short term loan requirements of corporate are met by the Commercial banks
b. Banks provide short term loans to corporates in the form of cash credit or in the form of overdraft. Cash credit is given to industrialists and overdraft is given to businessmen.

Economic Survey Chapter – 6

Fiscal Rules: Lessons from the States

Fiscal Rules: Lessons from the States(Economic Survey Chapter – 6)

Soon after the introduction of Fiscal Responsibility Legislation (FRL) most states have significantly reduced deficits Comparing average values for 10 years post and 11 years before passing of FSL by states, fiscal deficit has reduced to 2.4% from 4.1% of GSDP. However, the FRL was not the sole impetus behind this impressive fiscal performance. 
Acceleration of GDP growth, increased transfers from the Centre, decline in interest payments and increased central CSS expenditure contributed significantly to such consolidation. Desisting from splurging rather than belt-tightening was probably the real contribution of the States. 
Fiscal challenges are mounting because of the Pay Commission recommendations, slowing growth, and rising payments from the UDAY bonds. There is a need for some reforms to keep fiscal performance on track. Going forward greater market-based discipline on state government finances will be a major imperative. Secondly, attaching horizontal fiscal devolution with fiscal performance should be reconsidered. And, the Centre must take the lead not only in incentivizing fiscal b prudence by states but also by acting as a model through its own fiscal management.

Technical Terms
A. Various indicators of deficit in the budget are:
• Budget deficit =   total expenditure – total receipts
• Revenue deficit =  revenue expenditure – revenue receipts
• Fiscal Deficit = total expenditure – total receipts except borrowings ( it tells amount of borrowing required)
• Primary Deficit = Fiscal deficit- interest payments
• Effective revenue Deficit-= Revenue Deficit – grants for the creation of capital  assets
• Monetized Fiscal Deficit = that part of the fiscal deficit covered by borrowing from the RBI.
B. Intermediate T- bills – T-bills are short term (up to one year) borrowing instruments of the Government of India which enable investors to park their short term surplus funds while reducing their market risk. They are auctioned by Reserve Bank of India at regular intervals and issued at a discount to face value. In 1997, the Government had also introduced the 14-day intermediate treasury bills.
C. State Guarantee – It is a promise by state government to discharge off the liability of 3rd person in case of default.
D. Spread of Bond – The difference between the yields of two bonds with differing credit ratings. The bond spread will show the additional yield that could be earned from a bond which has a higher risk.
Gist of Economic Survey Chapter
To advance rather than defer the desirable goal of fiscal prudence, India like several other countries, embarked in the mid-2000s on an ambitious project of fiscal consolidation, adopting fiscal rules aimed at curbing fiscal deficits.
The FRBM Act, 2003 (as amended), which became effective from July 5, 2004 mandates the Central Government to eliminate revenue deficit by March, 2009 and to reduce fiscal deficit to an amount equivalent to 3 per cent of GDP by March,2008. The annual targets for fiscal correction were to be specified by rules to be framed under the Act.
This Chapter looks into fiscal discipline of states. Answer to the following questions can provide an analysis to present fiscal condition of states.
• To what extent did the FRL really make a difference – and in what ways?
• What are the other factors which enabled better fiscal management?
• What are the lessons for future fiscal rules?
Summary of the Fiscal Responsibility Legislation (FLR)
The FRL aimed to impose fiscal discipline through a number of mechanisms:
• Fiscal targets included the overall deficit to be contained within 3 percent of GSDP at any point, while the revenue deficit was to be eliminated by 2008/9 (later extended to 2009/10).
• The 12th Finance Commission allowed states to borrow directly from the market, in the hope that investors would also exercise some discipline, by pushing up interest rates on states whose fiscal position had not improved.
• States were required to publish annual Medium-Term Fiscal Policy reports, which would project deficits over the next three to four years, accounting for growth in big ticket expenditure items like pension liabilities.
• The fiscal deficit target was relaxed temporarily to 3.5 percent of GSDP in 2008/9 and to 4 percent of GSDP in 2009/10 in light of the global financial crisis (RBI, 2010). By FY 2010, the targets were set to the original FRL level of 3 percent.
• Subsequently, the 14th Finance Commission (FFC) recommended that fiscal deficit limits were to be relaxed by 0.5 percentage points for states which meet three conditions:
1. Zero revenue deficit in the previous year;
2. Debt to GSDP ratio lower than 25 percent; and
3. Interest payments to GSDP ratio less than 10 percent of GSDP.
To what extent did the FRL really make a difference – and in what ways?
Since 2005, after introduction of FLR, almost all sates made considerable improvement in their fiscal parameters like fiscal deficit, revenue deficit, primary balance and debt to GDP ratio.
• To access the impacts of FLR we need to exclude the exogenous factors and their impact on fiscal conditions of states. For this impact need to measure in FLR time (based on the number of years before or after the particular FRL was adopted).
• Centre also gave incentive for states to adopt fiscal rules and to enablethem to achieve these fiscal targets; the central government provided a conditional debt restructuring window, the Debt Consolidation and Restructuring Facility (DCRF). So states could substantially lower their interest payments in the same year that they adopted the FRL.
• The change in deficits and other fiscal indicators in FRL time should consequently be seen as a result of both the FRL targets as well as the debt restructuring facility.
Impact of FLR
• Within the first two years, states on average lowered their deficits to target levels — 3 percent for fiscal deficit and 0 for revenue deficits – while the primary balance shifted into surplus.The average debt to GSDP ratio accordingly fell by 10 percentage points to a mere 22 percent of GSDP in 2013.
• This progress has proved reasonably durable.
• States kept a tight rein on wage and salary expenditure. Instead, they expanded more discretionary spending, which would be easier to scale back if needed to achieve the deficit targets.
• On two parameters of Off Budget Expenditure i.e. explicit guarantees by state government and borrowing by state PSUs; in the first three years after FRL adoption the flow of explicit guarantees actually turned negative, however after three years, states began to add guarantees, at about the same pace as before. It is therefore encouraging that FFC recommended the notion of “extended debt”, which includes guarantees to public sector enterprises; borrowing by state utilities also fell after the FRL from 4.3 percent of GSDP to 3.4 percent of GSDP mainly due to major debt restructuring agreement in 2002/03.
• On budget process States were able to generate accurate forecasts of revenues and expenditures.
• States cash balances rises i.e. holding of Intermediate Treasury Bills (ITBs) have accordingly increased from 0.9 percent of GSDP to 1.3 percent of GSDP between 6 years before and 10 years after the FRL to smooth their expenditure in case of delay of centre transfers.
• FLR encouraged states to prevent from spending their entire windfall.
Why Primary deficit did not improve after FLR?
The primary deficit does not exhibit a significant decrease even in the first two years and in fact rises in later years. This is consistent with the hypothesis that the major decreases in the fiscal deficit came from the reduction in interest payment – which suggest decreased significantly in the first two years by 0.3 percentage points.
What are the other factors which enabled better fiscal management?
Though after 2005, fiscal indicators improved significantly. Yet just because fiscal progress followed the introduction of the FRL doesn’t mean the FRLs were entirely responsible for this progress. To begin with, the deficit reduction owes much too favourable exogenous factors:
• An acceleration of nominal GDP growth (of 6 percentage points on average) helped boost states’ revenues by about 1 percent of GSDP;
• Increased transfers from the centre of about 1 percent of GSDP both because of the 13th Finance Commission recommendations and the surge in central government revenues;
• Own tax revenues as a percent of GSDP increase by 1 percentage point, largely due to high GDP growth and adoption of VAT.
• Reduced interest payments of about 0.9 percent of GSDP on account of the debt restructuring package offered by the centre; and
• Reduced need for spending by the states—estimated at about 1.2 percent of GDP—as the centre took on a number of major social sector expenditures under the Centrally Sponsored Schemed.
What are the lessons for future fiscal rules?
The uniqueness or one-off character of the FRL experience is suggested by the relatively quick “decay.” That is, a few years after the FRL, all indicators of fiscal performance—deficits, expenditures, and especially off-budget activities—started deteriorating. As the fiscal challenges mount for the states going forward because of the Pay Commission recommendations, slowing growth, and mounting payments from the UDAY bonds, there is need to review how fiscal performance can be kept on track.
• There may need to be greater reliance on incentivizing good fiscal performance i.e. The Fourteenth Finance Commission (FFC) attempted to shift toward incentives by relaxing some of the FRL limits for better-performing states.
• Incentive mechanism deployed by the Thirteenth Finance Commission (TFC) of allocating resources across states (the so-called “horizontal” criteria) based on states’ own fiscal performance (proxy by own tax revenue collections) need to be revived.
• Greater market-based discipline on state government finances is imperative. Spread on state government bonds should be correlated with their debt or deficit positions.
• Incentivizing good performance by the states will require the centre to be an exemplar of sound fiscal management itself.
Supplementary Readings
A. Difference between Central Sector and Centrally Sponsored Scheme
In India’s developmental plan exercise we have two types of schemes viz; central sector and centrally sponsored scheme. The nomenclature is derived from the pattern of funding and the modality for implementation. Under Central sector schemes, it is 100% funded by the Union government and implemented by the Central Government machinery. Central sector schemes are mainly formulated on subjects from the Union List. In addition, the Central Ministries also implement some schemes directly in States/UTs which are called Central Sector Schemes but resources under these Schemes are not generally transferred to States.
Under Centrally Sponsored Scheme (CSS) a certain percentage of the funding is borne by the States in the ratio of 50:50, 70:30, 75:25 or 90:10 and the implementation is by the State Governments. Centrally Sponsored Schemes are formulated in subjects from the State List to encourage.
B. The States’ Debt Consolidation and Relief Facility 2005-2010
Twelfth Finance Commission (TFC) has recommended a two fold strategy for fiscal consolidation and elimination of revenue deficit of the States.
Central Loans to States contracted till March, 31, 2004 and outstanding on March 31, 2005 may be consolidated and rescheduled for a fresh term of 20 years (resulting in repayment in 20 equal instalments) and an interest of 7.5 percent be charged on them.
The general debt relief, as stated above, comprising consolidation, reschedulement and lowering of interest rate shall be available to the States with effect from the year they enact Fiscal Responsibility and Budget Management legislation.
TFC has also framed a scheme of debt waiver based on fiscal performance linked to the reduction of revenue deficits and control of fiscal deficit of the States. In effect if the revenue deficit is brought down to zero, the entire repayments during the award period of TFC will be written off.
C. Relevant Recommendations of 14th Finance commission (FFC)
The fiscal deficit targets and annual borrowing limits for the States during our award period are enunciated as follows:
i. Fiscal deficit of all States will be anchored to an annual limit of 3 per cent of GSDP. The States will be eligible for flexibility of 0.25 per cent over and above this, if their debt-GSDP ratio is less than or equal to 25 per cent in the preceding year.
ii. States will be further eligible for an additional borrowing limit of 0.25 per cent of GSDP in a given year for which the borrowing limits are to be fixed if the interest payments are less than or equal to 10 per cent of the revenue receipts in the preceding year.
If a State is not able to fully utilise its sanctioned borrowing limit of 3 per cent of GSDP in any particular year during the first four years of award period (2015-16 to 2018-19), it will have the option of availing this un-utilised borrowing amount (calculated in rupees) only in the following year but within award period.
In order to accord greater sanctity and legitimacy to fiscal management legislation, FFC urge the Union Government to replace the existing FRBM Act with a Debt Ceiling and Fiscal Responsibility Legislation, specifically invoking Article 292 in its preamble. This could be an alternative to amending the existing FRBM Act as proposed. FFC urge the State Governments also to consider similar enactments under Article 293(1).

Gold Schemes

Gold Schemes

The Indian government has come out with three gold schemes, the combined purposes of which are to reduce India’s gold imports and bring all the gold lying idle with individuals and households in India into the economy.
The schemes are as follows:
1. Gold Monetization Scheme (GMS)
• The proposed GMS is a revamped version of the erstwhile Gold Deposit Scheme (GDS) and Gold Metal Loan (GML) which were launched in 1999 and 1998 respectively.
• As per the current scheme, the depositor of gold would be given a certificate specifying the amount and purity of the deposited gold, once the investor agrees to do so after fire-assay test done by Collection and Purity Test Centres (CPTCs, certified by Bureau of Indian Standards).
• Subsequently, the customer could submit this certificate to any designated branch of a bank to open a gold savings account in his/her name. Accordingly, the customer’s account would be credited by the bank by “an amount equivalent to the quantity of standard gold of 995 fineness”, based on the prevailing market prices.
• Government will pay banks a total commission for the 1st year to incentivize their participation in popularizing the scheme. This commission includes 1.5% for handling charges and is expected to encourage crucial support as similar programs failed in the past as a result of negligible returns for banks.
• Premature redemption under Medium and Long Term Government Deposits (MLTGD), Any Medium Term (5-7 Years) Deposit will be allowed to be withdrawn after 3 years and any Long Term (12-15 Years) Deposit after 5 years, however this may reduce interest rates. Early withdrawal will provide flexibility to peoples.
• Gold depositors can also give their gold directly to the refiner rather than only through the Collection and Purity Testing Centers (CPTCs). This will encourage the bulk depositors including Institutions to participate in the scheme
• Bureau of Indian Standards (BIS) has modified the licensing condition for refiners already having National Accreditation Board for Testing and Calibration Laboratories (NABL) accreditation from the existing 3 years refining experience to 1 year refining experience. This is likely to increase the number of licensed refiners.
• The quantity of gold collected under the scheme will be expressed up to three decimals of a gram. This will give the consumer better value for the gold deposited.
• Gold to be deposited with the CPTCs/Refineries can be of any purity. The CPTC/Refiner will test the gold and determine its purity which will be basis on which the deposit certificate will be issued.
2. Sovereign Gold Bond Scheme
• Due to various global disturbances like 9/11 attack, followed by Iraq war, and financial crisis, Gold prices appreciated, as it is considered to be the best investment in times of volatility. Thus, a lot of people in India started to store their money in form of Gold to get better returns.
• This, however, removed vital financial assets from the financial markets and shifted that into bank lockers, which doesn’t pay any real dividends to economy.
• The scheme will help in reducing the demand for physical Gold by shifting a part of the estimated 300 tons of physical bars and coins purchased every year for Investment into Gold bonds. Since most of the demand for Gold in India is met through imports, this scheme will, ultimately help in maintaining the country’s Current Account Deficit within sustainable limits.
• The salient features of the Scheme are:-
a) Sovereign Gold Bonds will be issued on payment of rupees and denominated in grams of Gold.
b) Bonds will be issued on behalf of the Government of India by the RBI. Thus, the Bonds will have a sovereign guarantee.
c) Eligibility: Resident Indian entities including individuals, HUFs, Trusts, Universities and charitable institutions
d) Denomination: Multiples of gram(S) of gold with a basic unit of 1 gm
e) Tenure: 8 years with an exit option from the 5th year to be exercised on the interest payment dates
f) Minimum size: 2 units (i.e. 2 grams of gold)
g) Maximum limit: 500 grams per person per fiscal year (April-March). The Compliance will be on self-declaration basis
h) Frequency: The Bonds will be issued in tranches; each tranche will be kept open for a period to be notified. The issuance date will also be specified in the notification. For example, currently it is the 2nd trance which is up for sale, 1st trance sold out by January 22, 2016.
i) Interest rate: Fixed rate of 2.75% per annum payable semi-annually on the initial value of investment
j) Collateral: Bonds can be used as collateral for loans. The Loan-To-Value (LTV) ratio is to be set equal to ordinary Gold loan mandated by the Reserve Bank from time to time
k) Tax treatment: Capital gains tax treatment will be same as for physical gold for an ‘individual’ investor
l) Tradability: Bonds will be tradable on exchanges
m) SLR eligibility: The Bonds will be eligible for Statutory Liquidity Ratio (SLR) as they form part of market borrowing program of the Government of India (GOI). This, means banks can also opt for high yielding asset for SLR funds.
• Thus, it is evident Government want to provide incentives to people to for go investment in physical Gold and instead it wants to bring that investment to the industry and infrastructure.
• Similarly it is important that government must use this money in projects with very high returns.
3. Indian Gold Coins/Gold Bullion Scheme
• The coin will be the 1st ever National gold coin minted in India and will have the National Emblem of Ashok Chakra engraved on one side and Mahatma Gandhi on the other side .
• Initially the coins will be available in denominations of 5 and 10 grams; later a 20 gram bullion will also be available through MMTC outlets.
• It would provide gold coins of maximum possible purity and check the supply of counterfeit or adulterated gold sold by jewelers.
• While it may not address people looking forward to buy jewellery, but people who buy gold coins for investment purposes can buy these, if they are still reluctant about the Gold bond scheme.
• Physical gold coins are more liquid resource compared to gold bonds, as perceived by many people in India.

Recent initiatives in Reality Sector

Recent initiatives in Reality Sector

The real estate sector is one of the most globally recognised sectors. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade.
Thus to improve the Real Estate Sector following initiatives have been taken:
A. Real Estate (Regulation and Development) Act or RERA: The much-awaited Act was passed in March 2016. Some of the broad features of the Act are:
• Mandatory registration with real estate regulatory authorities (RERA) of projects.
• Project developers will now be required to deposit at least 70% of their funds, including land cost, in a separate escrow account to meet the cost of construction.
• Appellate tribunals will adjudicate cases in time bound manner. Act also includes provision for imprisonment of promoters, real estate agents and buyers for violation of orders of appellate tribunals.
• A clear definition of carpet area.
Impact of Real Estate (Regulation and Development) Act
The legislation would promote transparency in the sector. It would facilitate greater volumes of domestic as well as foreign investment flows into the sector. The confidence of home buyers in the property market is also likely to return. A regulator will bring in credibility for the sector in the long run. This is further likely to open up funding avenues and bring down lending costs for the sector. The sector will undergo some major changes such as consolidation of players, and increasing incidences of joint ventures.
B. Real Estate Investment Trusts (REITs): Real Estate investment Trusts or REITs are mutual fund like institutions that enable investments into the real estate sector by pooling small sums of money from multitude of individual investors for directly investing in real estate properties. They are regulated by the SEBI.
Impact of REITs
• REIT would be beneficial to both developers as well as investors. Developers are struggling to reduce debt, it would give them access to capital, while on the other hand it gives investors the ability to participate in country’s property market which otherwise may be out of their reach due to the sheer size of the amount to be spent for acquiring such properties. Thus, from the perspective of investors, holding units of REITs is a substitute for investing directly in real estate.
• REITs would also enable diversification of the portfolio of the investors and provide the investors a new product that is regular income generating.
• The freeing up of developer’s capital is expected to bring in more investments in real estate, thereby stimulating growth. Funds locked up in various completed projects can be released to facilitate new infrastructure projects to take off.
• REITs will force much needed transparency at least in the commercial sector, and lower the reliance on financing from banks. It will help the investors in making more informed investment decisions as returns can actually be analyzed rather than be based upon anecdotes.
• In time, it will help develop a more mature and liquid market with broad participation from investors.
C. Insolvency and Bankruptcy Code 2016: The Insolvency and Bankruptcy Code 2016 provides legal and institutional machinery for dealing with debt default in line with global standards. The salient features of the code are:-
• Clear, coherent and speedy process for early identification of financial distress and resolution in business firms.
• Debt Recovery Tribunal and National Company Law Tribunal to act as Adjudicating Authority and deal with the cases related to insolvency, liquidation and bankruptcy process.
• Establishment of an Insolvency and Bankruptcy Board of India to exercise regulatory oversight over insolvency professionals, insolvency professional agencies and information utilities.
• Enabling provisions to deal with cross border insolvency.
Impact of Insolvency and Bankruptcy Code 2016
It will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a database of serial defaulters. This means easy exit of firms and recovery of loan by banks and consequently easy flow of funds for future projects in real estate sector.

Special Economic Zone

Special Economic Zone

Special Economic Zone (SEZ) is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs in India.
Within SEZs, units may be set-up for the manufacture of goods and other activities, including processing, assembling, trading, repairing, reconditioning, making of gold/silver, platinum jewellery, etc.
As per law, SEZ units are deemed to be outside the customs territory of India. Goods and services coming into SEZs from the domestic tariff area or DTA are treated as exports from India and goods and services rendered from the SEZ to the DTA are treated as imports into India.
Today, there are approximately 3,000 SEZs operating in 120 countries, which account for over US$ 600 billion in exports and about 50 million jobs. By offering privileged terms, SEZs attract investment and foreign exchange, spur employment and boost the development of improved technologies and infrastructure.
India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.
This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.
The Special Economic Zone Act, 2005 came into force with effect from 2006. The SEZs Rules, inter-alia, provide for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
The main objectives of the SEZ Act are:
a) Generation of additional economic activity;
b) Promotion of exports of goods and services;
c) Promotion of investment from domestic and foreign sources;
d) Creation of employment opportunities;
e) Development of infrastructure facilities;
The SEZ Rules provide for:
• Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs.
• Single window clearance for setting up of an SEZ.
• Single Window clearance on matters relating to Central as well as State Governments.
• Exemption from customs/excise duties for development of SEZs for authorized operations approved by the BOA.
• Income Tax exemption on income derived from the business of development of the SEZ in a block of 10 years in 15 years under the Income Tax Act.
• Exemption from minimum alternate tax, dividend distribution tax , Central Sales Tax (CST) and Service Tax.
• Generation of additional economic activity.
• Promotion of exports of goods and services.
• Promotion of investment from domestic and foreign sources.
• Creation of employment.
• Development of infrastructure facilities.


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