Finance Ministry imposes Capital Controls

Finance Ministry of India imposed some capital controls to control the surging dollar inflows and prevent further rupee appreciation. This time also they have imposed controls on External Commercial Borrowings (ECB).

Capital Controls could be of various types and so far policy makers have been targeting External Commercial Borrowings. These are loans Indian companies raise in Dollars/Pounds etc for financing their expenditure. Earlier, a control was imposed via which companies could not raise loans by offering interest rates higher than stipulated.

This time they have categorised ECBs:

• Any company raising External Commercial Borrowings of more than USD 20 million would be permitted to use the same only for financing permissible foreign expenditure i.e. imports, acquisitions abroad. This implies that dollars raised via ECBs will have to be spent overseas and cannot be used to finance rupee expenditure.
• Companies raising ECB less than USD 20 million for financing expenditure in India, would require permission from RBI for doing the same.

So some development on rupee appreciation. Let us see the impact.

Update: Ajay Shah feels the capital controls would not be effective.

Rupee Appreciation, Basics and solutions

Rupee Appreciation and possible solutions is the hot topic in every discussion. I came across these two interesting write-ups on the hot topic that discuss both the basics of the problem (Impossible Trinity etc) and possible solutions.

1. A discussion on Wharton India Knowledge. This has number of economists and experts sharing their views. Thanks to my friend Siddharth Chaudhary for the pointer.

2. Ila Patnaik  shares her views in Indian Express. Thanks to Ajay Shah for the pointer.

SEBI report on infrastructure mutual funds

SEBI had formed a committee to look at launching Dedicated Infrastructure Funds (DIF) in India. The report has been put on SEBI’s website for comments. The press release is here and  report is here.

The central idea is to channelise the household savings in building India’s infrastructure. As of now mutual funds only invest in listed companies involved in infrastructure and related services. The committee recommends ways in which mutual funds can invest in unlisted companies involved in infra and also suggests various measures to make them popular among households and individuals.

Main recommendations:

• DIFs should operate as closed ended schemes with a maturity of seven years and a possibility of one or two extensions; should be given a listing option to provide liquidity to retail investors.
• For making them popular, offer tax incentives to retail investors.
• DIFs may be allowed to invest upto 100% of its funds into unlisted securities including both equity and debt instruments.
• On the issue which attracts most, the fees and expenses of these funds cannot be  comparable to others as it would involve analysing unlisted companies. Hence, these schemes would have higher expenses. The Committee suggests that maximum overall permissible expense ratio can be additional 1% over and above that specified in the Mutual Fund Regulations.
• DIFs should report the fund NAV at the time of each asset valuation and also at quarterly intervals.
• About valuations, the Committee believes that current SEBI guidelines to value unlisted equity shares will need to be suitably amended for the proposed asset class. 

I have still not read the report fully, so cannot comment. However, it looks pretty interesting as it has some international case-studies as well.

For me, it is more interesting as I had mentioned this as one of the suggestions to finance India’s infrastructure  in my internship report I had done some time back.

Read on.

Assorted Links

1. Tyler Cowen clarifies that he is not first best economist as Rodrik mentioned in his posting y’day. Excellent stuff.

2. WSJ has some excellent pieces in its assorted section. See this graphic representation of sub-prime mortgage markets mess. This oneon Adam Smith and I-phone is also quite good.

3. WSJ Blog points (attributes it to Freakonomics Blog) out to a new paperwhich says UK companies that changed their names underperformed for a long time period. This would interest India’s UTI bank that changed its name to Axis Bank.

4. Dani Rodrik pointsto some interesting comments from eminent economists.

5. Finance Prof has number of interesting links.

6. PSD Blog turns two and it points out to its most popular posts. Read this one in particular – why Africa doesn’t get portfolio investment. Answer- its exchanges are pretty small.