There are two aspects to news- knowing the headline and understanding the intricacies of it. We at The Connectere focus on both. While The First Forum edition gives a brief about the headlines, The Weekly Analysis Edition is meant to educate the reader on what do various news mean and what are their intricacies. This initiative is meant to educate the reader on how to understand the important news. In the Economic Package Edition we are covering the following news:
1. RBI raises the borrowing limit to 3% of SLR under the Marginal Standing Facility
2. ISRO facilities now open for private players: What does the new Government order mean?
3. EGMs now allowed via video conference, other audio-visual means
4. How does a new definition help MSMEs?
5. Credit Guarantee Scheme to the MSMEs
6. Liquidity relief to taxpayers, employers and employees

By Shruti Jha, Nikunj Gulati and Kanika

RBI raises the borrowing limit to 3% of SLR under the Marginal Standing Facility

The Reserve Bank of India (RBI) has said that the outlook for domestic financial markets remained highly uncertain and the Coronavirus pandemic would accentuate growth slowdown. The central bank also reaffirmed that better transmission of monetary policy impulses will remain a priority. The Reserve Bank has announced to conduct auctions of targeted long-term repos (TLTRO) of up to three years tenor of appropriate sizes for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate. Liquidity availed by banks under TLTRO’s shall be deployed in investment-grade corporate bonds, commercial paper, and non-convertible debentures over and above the outstanding level of their investments in these bonds as on March 27, 2020.

Further, the CRR requirement of banks was reduced by 100 bps from 4 percent of NDTL to 3 percent which would augment primary liquidity in the banking system by about Rs 1,37,000 crore and the minimum daily CRR balance requirement was reduced from 90 percent to 80 percent and this dispensation will be available up to June 26, 2020. In view of the exceptionally high volatility in domestic financial markets and to provide comfort to the banking system, banks’ limit for borrowing overnight under the MSF by dipping into their Statutory Liquidity Ratio (SLR) was raised to 3 percent of NDTL from 2 percent.

This measure will allow the banking system to avail an additional Rs 1,37,000 crore of liquidity under the liquidity adjustment facility (LAF) window at the reduced MSF rate of 4.65 percent. The policy repo rate under the Liquidity Adjustment Facility (LAF) was reduced by 75 basis points to 4.40 percent from 5.15 percent with immediate effect. Accordingly, the MSF rate and the Bank Rate were reduced to 4.65 percent from 5.40 percent. Keeping in mind the persistent excess liquidity, the existing LAF corridor was widened asymmetrically to 65 bps from 50 bps. Accordingly, the reverse repo rate was reduced by 90 bps from 4.90 percent to 4.00 percent. The purpose of this measure was to make it relatively unattractive for banks to passively deposit funds with the RBI; instead, these funds should be deployed for on-lending to productive sectors of the economy. Thus, the reverse repo rate is now 40 bps lower than the policy repo rate while the MSF rate continues to be 25 bps above the policy repo rate.

ISRO facilities now open for private players: What does the new Government order mean?

Finance Minister Nirmala Sitharaman on 16th May 2020 said the private sector and startups in the country will be allowed to use ISRO facilities and other relevant assets to improve their capacities. Also, future projects for planetary exploration, outer space travel, etc., will be opened for the private sector, the FM announced while addressing her fourth press conference to announce the government’s roadmap towards self-reliant India and revive the economy battered by the nationwide coronavirus-induced lockdown. The finance minister further added that it will provide a level playing field for private companies in satellites, launches, and space-based services.

Also, the government will provide a predictable policy and regulatory environment to the private sector, Sitharaman noted while announcing the reforms for different sectors. India already has the benefit of an extraordinary institution like ISRO, but now lots of private players are also coming in with innovative space technology. We will allow private players to benefit from ISRO’s assets and give them a level-playing field to boost India’s space sector further. With a special focus on the space sector, the Finance Minister added that there is a lot of geospatial data available in India. Currently, startups, tech firms, and private companies have to go abroad, but that will now change. This is a sensitive area and will follow strict guidelines, but will make information available to startups and private firms.

Responding to the government’s announcement, ISRO also tweeted that the Department of Space will follow Government guidelines and enable private players to carry out space activities in the country. According to reports, there are about 120 active startups working in the space sector now. And, most of them emerged in or after 2014. As of 2019, their cumulative funding stood at $6.2 million. Startups will also now have access to the treasure trove of data with ISRO as geospatial data policies become liberalized to provide remote-sensing data to tech-entrepreneurs.

EGMs now allowed via video conference, other audio-visual means

The Ministry of Corporate Affairs (MCA) issued a circular allowing companies to hold Extraordinary General Meetings (EGMs) through video conferencing (VC) or other audiovisual means (OAVM), complemented with e-voting facility or simplified voting through registered emails. The relaxation does away with the requirement of the shareholders to physically assemble at a common venue. The Companies Act, 2013 allows ordinary and special resolutions to be passed through postal ballot or e-voting route without holding a physical general meeting.

However, in present lockdown/social distancing conditions due to COVID 19, postal ballot facility cannot be utilized by the companies, an official statement said. It said that the circular issued by the MCA allows listed companies or companies with 1,000 shareholders or more to provide an e-voting facility under the Companies Act, 2013 to conduct EGM through VC or OAVM and e-voting. For other companies, a highly simplified mechanism for voting through registered emails has been put in place for easy compliance. The framework leverages the strengths of digital India by using a combination of VC and e-Voting/simplified voting through registered emails to enable companies to conduct their EGMs. As the meetings will be conducted over VC/ OAVM, the facility for the appointment of proxies has been dispensed with, while representatives of bodies corporate will continue to get appointed for participation in such meetings. This framework allows the companies to hold EGMs through VC and OAVM without compromising on the other requirements of law.

As an additional check, all companies using this option are required to maintain a recorded transcript of the entire proceedings in safe custody, and public companies are also required to host this transcript on their website for greater transparency. Further, all resolutions passed through this framework will be required to file with the Registrar of Companies within 60 days, so that such resolutions may be viewed publicly.

small townHow does a new definition help MSMEs?

The Union Finance Minister broadened the definition of micro, small and medium enterprises. This was made under the first part of the recent economic stimulus package for Atmanirbhar Bharat Abhiyan. In order to redefine the MSMEs, the government has taken the following measures:

  • Increased investment limit.
  • Introduced turnover based criteria.
  • Eliminated differences between the manufacturing and service sector.

Here look at the new definition of MSME.

  1. Micro Units: Companies with investment up to Rs.1 crore and turnover below Rs. 5 crores.
  2. Small Units: Companies with investment up to Rs. 10 crores and turnover below Rs.50 crores.
  3. Medium Units: Companies with investment up to Rs.20 crore and turnover below Rs.100 crores.

Why this change?

The definition has been changed in favor of MSME. The new definition has a message that no longer small companies have to remain small to avail benefits. The old MSME definition prevented these companies from growing. There has always been this fear that if they outgrow their size of what has been defined as an MSME, they will lose their entitled benefits. This is why MSMEs like to remain within the definition rather than grow. With the revised definition, they will not have to worry about growing their size and can still avail the benefits. The most important is the quantum jump in the definition of an MSME, which had not been changed since the MSME Development Act of 2006 and was long-awaited. But the manufacturing companies opposed using their turnover as the sole criteria arguing that it would allow traders to claim MSMEs (and the linked benefits) by importing goods and selling them without adding to the country’s manufacturer base and increased the competition for genuine MSME.

 How is this beneficial?

  1. It likely to benefit retailers and contractors as the distinction between manufacturers and services has been removed.
  2. It will help in the seamless expansion of small and medium businesses in the country.
  3. The upward revision in the investment limit of MSMEs will help bring an increased number of units access to institutional working capital.
  4. Turnover criteria bring greater transparency in the classification for the government to verify a company turnover using the GST data than the investment in machinery etc. Plus, it allows a lot of firms especially in the service sector like mid-sized hospitals, hotels, etc to be eligible as an MSME.

In addition, the government has disallowed global companies from participating in tenders up to Rs. 200 crores, earmarked that space exclusively for Indian companies to boost self-reliant India, Make in India and vocal about local initiatives. So, with the decision to not have global tenders, the redefinition with assisting the MSME sector in the growing and emerging as a vibrant and dynamic sector contributing to self- reliance, and employment in a big way.

Credit Guarantee Scheme to the MSMEs

The Finance Minister has announced the details of the Atmanirbhar Bharat Abhiyan economic package. The main thrust of the announcement was a relief to micro, small and medium enterprises in the form of a massive increase in the credit guarantee to them. A Credit Guarantee Scheme by the government assures the bank that its loans will be repaid by the government in case the MSME falters.

Why the introduction of the Credit Guarantee Scheme?
Efforts to pump liquidity via the banks have been a non-starter because banks simply do not want to lend any new money. Banks, quite justifiably suspect that any new loans will only add to their growing mountains of non-performing assets. Thus, the government faced a dual problem wherein banks had money but were not willing to lend to the credit-starved sections of the economy, while the government did not have enough money to directly help the economy. The solution to solve the dual problem faced by the government is the Credit Guarantee Scheme.

So, what is the quantum of credit guarantee provided to the MSMEs?
There are three proposals but the main one is for the stranded MSMEs i.e. those MSMEs which were running fine until the COVID-19 induced lockdown disrupted their work. For these, the government has provided collateral-free loans worth Rs.3 lakh crore. This is like an emergency credit line and it is for the MSMEs that have an already outstanding loan of Rs.25 crore or those with turnover less than Rs.100 crore. The loans will have a tenure of four years and moratorium of 12 months (that is, the payback starts only after the 12 months) valid up to 31 October 2020.

In the other two proposals, the second one is a Subordinate Debt Scheme worth Rs.20,000 crore will be provided to MSMEs that were already categorized as stressed or struggling to pay back. In this case, the government guarantee is not full but partial. The third one is Equity Infusion is the creation of a fund with a corpus of Rs.50,000 crore to infuse equity into viable MSME, thus helping them to expand and grow.

How far will these measures help?

  1. The credit guarantee helps the formal banking system to meet the credit demand of the MSME sectors.
  2. These measures are likely to have a significant impact on helping MSMEs to pay salaries and keep their hands above water even as the economy slows down.
  3. This will benefit the 45 lakh MSME units, who are really in need of working capital and cash flows to resume work and save jobs.

There is always the other side of the coin. The Credit Guarantee Schemes creates moral hazards as borrowers remain assured of paying back and the lender remains assured of receiving credit amounts. Subsequently, the government is forced to pay the amount. A more prudent option would have been a half guarantee (say an 80%-20%) wherein the government assures to pay only 80% of the new loans. This circumvents the problem of a moral hazard.

Liquidity relief to taxpayers, employers and employees

The first tranche of the AtmaNirbhar economic package was focused on small industries (MSMEs) while some relief was also given to the honest taxpayers, employees, and employers because the economic package is also for the middle class of the country, which pays taxes honestly and contributes to the development of the country.  The Finance Minister announced a slew of measures to give relief to the taxpayers. These include a reduction in rates, to the extension of compliance dates for IT returns and prompt tax refunds. Three major takeaway for taxpayers are:

  1. TDS / TCS Reduction In order to provide more funds at the disposal of the taxpayers, the rates of Tax Deduction at Source (TDS) for specific non-salaried payments and Tax Collection at Source (TCS) for specific receipts will be reduced for 25% of the existing rates. Payments for interest, rent, dividend, commission, contracts, etc shall be eligible for this reduced rate of TDS. The government expects that the reduction in rates will help out Rs.50,000 crore in the hands of the people in the form of liquidity, which they otherwise would have paid as tax.
  2. Income Tax: The due dates of all income tax returns for the year 2020-21 will be extended to Nov30, 2020. Similarly, the tax audits will be extended to Oct31,2020. The dates for the making payment without an additional amount under Vivad Se Vishwas scheme will also be extended to Dec31,2020. Hence the extension of due dates will enable the taxpayers to defer the payment without attracting any interest.
  3. Tax Refunds:All pending refunds to Charitable trusts, non-corporate businesses, and professions like proprietorship, partnership, LLP, and Co-operatives to be issued immediately. Thus, ensured Rs.18,000 crore refunds given to taxpayers, the intention being liquidity in the hands of the people. The government highlighted that 14 lakh payers will be benefited from the cleaning of the IT refunds. However, opposition leaders wondered how the money that the government anyway owed to the citizens was labeled as a relief measure to combat the pandemic.

It has to be noted that these measures don’t bring down the tax liability of taxpayers, it leaves more money with them adding the course of the financial year.

In a relief to the employers and employees, the government made two key announcements regarding a contribution towards the Employee Provident Fund.  First, the extension of EPF benefits for another 3 months (Jun to Aug) for companies employing up to 100 workers of which 90% less than Rs.15,000 per month. Second, the reduction of the Statutory Provident Fund contribution by both employers and employees to 10% of basic wages from the existing 12% for the next three months. This decision has been taken to facilitate more take-home relief salary for employees and give relief to employers in payment of PF dues resulting in liquidity ease of Rs.6,750 which will have an impact on 4.3 crore employees and 6.5 crore employers.

As per the aforementioned measures taken by the government, it can be concluded that the Indian economy needs both supply and demand measures for the revival. And the government also focused on both sides. For supply-side measures, the government aimed at activating business in the MSMEs, real estate, etc, and to boost the demand government aimed at increasing the disposal income of households through cash transfers and tax concessions.

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