NATIONAL ISSUES-2015

Page 1 of 51

Abolition of Death Penalty Pro and Cons

The issue of capital punishment has been a very contentious one in India. For a long the
Law Commission of India has been pondering on the issue and finally it suggested in its
262nd report in August 2015 to discontinue practice of capital punishment in all crimes
barring terror or/and treason.

The timing of these two events may be coincidental but together they have raised a question
mark on continuation of death penalty.

A principal argument in favor of total abolition of death penalty from India has been that as
India aspires to emerge as a global power with soft skills at the forefront of its global claim to
fame, a barbaric punishment like death penalty does not go hand-in-hand with its intended
image of a democratic, responsible and peace loving nation.

On the other hand a large section of our administrative machinery is quite uncomfortable
with the notion of discontinuing with the practice - at least for the time being. Though the
Union Home Ministry has refrained to issue any statement on this issue, the Supreme Court
of India has also repeatedly said that it does not consider death penalty as inhuman and
wants it to remain as one of the options among the various forms of legal deterrents.
However before going to have a look at all these contrasting viewpoints, let us first analyze
the Law Commission of Indias report and what can be its wider implications.

Law Commissions PoV on Capital punishment

While recommending doing away with the death penalty the 10-member panel headed by the
former Delhi High Court Chief Justice A P Shah opined that while death penalty does not serve
the penological goal of deterrence any more than life imprisonment, its continuance makes our
system look a bit more barbaric.
What are basis of LCoIs recommendations?
While submitting its report the Law Commission has raised various issues that make capital
punishment a redundant practice under the current circumstances.

The panel has analyzed Indias crime stats and has come to the conclusion that validity of
death sentence being an ultimate deterrent is questionable as Indias murder rate has
declined - falling from 4.6 per 100,000 people in 1992 to 2.7 per 100,000 in 2013 despite
the fact that rate of executions in the murder cases have also gone down past 1990s.

On the other hand despite the much touted Dhananjoy Chakarvarti case his hanging has not
deterred the criminals from forsaking heinous crime against women.

The rarest of rare doctrine which is the main basis of awarding death penalty in Indiahas also not been held in high esteem by the LCoI. According to the panel it gives to much
power to the judges and even within the restrictive environment of rarest of rare doctraine
it was constitutionally unsustainable.

Page 2 of 51

The panel has set that the recent analysis of death sentences does not project a set pattern
and there have been too much concerns about arbitrary sentencing. As of now there exists
no principled method to remove such arbitrariness from capital sentencing.

The commission also questioned the mercy petition system, provided for under the
Constitution, saying, The exercise of mercy powers under Articles 72 and 161 have failed in
acting as the final safeguard against miscarriage of justice in the imposition of the death
sentence.

While more than mercy petitions have either been accepted or rejected by the President,
they have failed to contribute in evolving any set of guideline as to how a mercy petition be
accepted or rejected. Furthermore, the panel said, most of the recent mercy petitions seems
to have been decided on the basis of needs of the administration and has opened the way
for judicial imprudence.

The president of India, in considering a mercy petition, is constitutionally obligated to not

deviate from the advice of the council of ministers. There have been occasions where the
president has refrained from taking any decision altogether on the said mercy petition, thus
keeping the matter pending. And thus the disposal of a mercy petition becomes an
executive decision rather than being a judicial one.

Citing the lack of resources before Indias judicial system the Law Commission has said that
an overstretched police force and ineffective prosecution makes a watertight case against
the perpetrators almost impossible. As a result, the administration of capital punishment is
vulnerable to misapplication.

Very often people sentenced to death by Indian courts face long delays in trials and
appeals, the report said. During this time, the prisoner on death row suffers from extreme
agony, anxiety and debilitating fear arising out of an imminent yet uncertain execution. It
added that solitary confinement and harsh conditions imposed on prisoners were degrading
and oppressive. All this makes death penalty a double whammy for condemned people.

Main arguments against Capital punishment

Globally all human rights organization oppose capital punishment as the worst violation of
human rights. A prominent viewpoint is that taking life is beyond human capacity and by
doing this we violate the nature.

Legal opposition of the practice comes with a viewpoint that it violates the reformist agenda
of judiciary. In many cases people who show immense potential in reforming themselves are
executed because the heinous nature of crime in the past. Life imprisonment, the second
harshest punishment however gives the offender a chance to redeem himself and thus
serve the reforming nature of justice in a better way.

The deterrence is also a questionable point. China which has a policy for giving capital
punishment for corruption is the global leader in awarding capital punishment. Yet the

Page 3 of 51

cases of corruption keep increasing there and so does the executions. It has created a
vicious cycle rather than offering a solution.

The abolitionists also argue that the prime motive of a modern judicial system has to be
reformative and not retributive. They say that capital punishment is a state-sponsored killing
and is done to assuage the anger of society rather than achieving any kind of deterrence.
This is not acceptable in a modern day society.

People also argue that instead of killing a person it is better to imprison him till his death. In
several countries where capital punishment is banned people are given prison sentences of
up to 100 years. This makes any kind of gain from a crime unsustainable for such criminals.

Arguments in favour of capital punishment

The global experience of legal system reveals that rigorous and maximum punishment as
against a moderate and lesser punishment helps to prevent the chances of repetition of
commission of similar crimes. For the incorrigibles and habitual and hardened criminals
death penalty is best suited and it is the only method teaching hardened criminals.

It is also the best way to protect the community against callous criminals for a long time. The
impact of a death sentence deters most, barring some hardened criminals, to commit crimes
that warrant a death penalty. A point here is that ever since abetment of Sati has been
included in list of crimes for which death penalty can be given there has been no such case
in India. Though this may not be a universal truth but is holds its merit in most cases.

It is also an ultimate form of deterrence to deter criminals who are forced to undergo longterm imprisonment from repeating their criminal acts in future. Usually the tenure of life
imprisonment is around 14-20 years. Many culprits will accept it if the gains are substantial.
The presence of death sentence deters such criminals from committing such crimes. In a
country like India we do not have the resources to keep people in jails for much longer
duration, hence the option of giving a sentence of 50 or 60 years is not tenable for us.

There is no link between being developed and advanced society and abolition of death
penalty. USA is the most advanced society yet is gives more capital punishment than
Somalia- a completely lawless state. So the appraisal of threats to society needs more
importance in deciding whether abolition of capital punishment is allowed or not.

Still further even from the humanitarian point of view there is no proof that converting the
death sentence to life makes it any better for the convict. After all, his agony only gets
extended by living his remaining life deprived of all liberties, when the death penalty may
seem a better way out for him. So is society really being humane by converting his death
into life sentence? If not, would society like to explore releasing the convict at some point of
time, after he has served a long sentence? Should he be given a chance to spend his
remaining life or whats left of it, a free man?

Page 4 of 51

The Rarest of rare doctrine

The Indian judicial system is however a blend of reformative and deterrent theories. While
the punishments are to be imposed to deter the offenders, it is also inalienable part of Indian
penal jurisprudence that the offenders should be given opportunity for reformation. Bearing
in mind these fundamental tenets, the legislatures drafted Sec. 354 (3) of the CR.P.C. This
subsection basically lays down that special reasons are to be recorded by the Court for
imposing death punishment in capital offences. Thus, the position of law after Cr.P.C. 1973
became that the general rule was life imprisonment while the death sentence was to be
imposed only in special cases and that has given the way for the rarest of rare doctrine
followed by the judges in awarding a death sentence in India.

To decide whether a case falls under the category of rarest of rare case or not, for the Apex
court has laid down a few principles for deciding the question of sentence. One of the very
important principles is regarding aggravating and mitigating circumstances. Court opined
that while deciding the question of sentence, a balance sheet of aggravating and mitigating
circumstances in that particular case has to be drawn. Full weightage should be given to the
mitigating circumstances and even after that if the court feels that justice will not be done if
any punishment less than the death sentence is awarded, then and then only death
sentence should be imposed. However in many cases like Yakub Memon since the charge
was treason the potential of reformative process was not weighted. This is one of the major
flaws of rarest of the rare doctrine.

Constitutional validity of death sentence

In many cases the point of constitutional validity of death punishment has been raised
before the SC. It has been argued that the right to live was basic to freedom guaranteed
under Article 19 of the constitution and hence cannot be denied. The S.C. rejected the
contention and held that death sentence cannot be regarded as unreasonable per se or not
in the public interest and hence could not be said to be violating the said Article of the
constitution.

In a famous judgment the SC has also said that it is not possible to held that the provision of
death penalty as an alternative punishment for murder, in sec. 302, Penal Code is
unreasonable and not in the public interest. The impugned provision in Sec. 302 , violates
neither the letter nor the ethos of Article 19" .

Even more recently in the Yukub Memon case the SC judges, Justices TS Thakur, RK
Agrawal and AK Goel said that a sentence of death in a case of murder may be rare, but if
the courts have found it is the only sentence that can be awarded, it is difficult to revisit that
question."

Page 5 of 51

Why India cannot afford total abolition of capital punishment?

Total abolition of Capital Punishment is a myth rather than a reality. Even in England, where
no death penalty was awarded in the last 60 years, technically a capital punishment can be
lawfully imposed in cases of high treason, setting fire to Queens ships, arsenals etc and in
piracy with violence.

Ironically people change their view on death penalty quite rapidly. In 2013 after the
heinous Nirbhaya case almost the same voices who are supporting the abolition of death
penalty asked for hanging the rapist even when the law did not allow it. The duplicity of
these arguments can also be gauged from the fact that Law Commission recommendations
were used to opposed Yakub Memons hanging when the Law Commission itself wants the
terrorism and terror related cases to be kept under the purview of death sentence.

As far as moral and ethical questions are concerned no doubt religion preaches against
killing of human being but that presupposes an ideal society and if we cannot provide ideal
conditions then we cannot of particular aspect in isolation. Most of the death sentences are
awarded in case where a person has taken one or many lives by his act. Though two
wrongs do not make a right, still we allow anyone to keep committing errors without
repercussions.

The Indian state is certainly not in favour of abolition of death penalty as apart from the 2013
amendment mentioned above it is also pondering for death penalty in certain cases of
hijacking. The government is of the view that unlike many other countries that have allowed
abolition of death penalty, the fact is that none of the countries faced the kind of threat
emanating from cross border terrorism. As of now our country is dealing with militant and
terror attacks in J&K, Maoist attacks in states like Chhattisgarh, Jharkhand, Odisha, MP, and
AP, the insurgency in the North East etc. Therefore, what may be relevant to other countries
may not hold true in India, which faces a far greater threat at all times and has to fight it on
its own.

Again if the death penalty is abolished security forces may opt to take the law in their own
hands. Spot killings may see a spurt as they will fear that the criminal may escape
imprisonment and have a vengeance against them.

As far as the Law Commission report is considered they are merely suggestions and may
not prompt the government to take any concrete action. May be we can see a moratorium
on death penalty in few crimes but then also it has to pass the muster of SCs judicial
scrutiny. SC has a great faith in the rarest of the rare doctrine and it is only willing to keep it
refining. Clearly the Law Commission stand is going to neither get the support of judiciary
nor the executive will be willing to change the laws. So for the time being the capital
punishment is here to stay.

Page 6 of 51

The Black Money Act

A huge part of BJPs success in Lok Sabha polls 2014 was attributed to its promise to bring
back black money stashed in foreign accounts.

Soon after coming to power the NDA government, under the directive of the Supreme Court
of India, formed a Special Investigation Team (SIT) to explore the ways and means to curb
the black money menace. However even after passage of more than a year and half, neither
the SIT nor the government has managed to yield anything substantial on this issue.

The government has been trying to sign deals with various countries (and also fighting tooth
and nail in foras like G-20) to get the information about the illegally earned Indian money
stashed in foreign accounts, but the information is coming like drips, rather than the deluge.

Though there are multiple facets (involving international as well as domestic factors) of
getting back the black money one of the immediate requirements is to stop the further
movement of black money from the country. So there has been an urgent need to
strengthen judiciarys hands to throttle the outward flow of black money.

In this regard the passage of Undisclosed Foreign Income and Assets (Imposition of Tax)
Bill, 2015 colloquially termed as the Black money Bill by the Parliament can be a
significant step. Due to the urgent need of the issue the Bill received bipartisan support in
the parliament also swiftly got the nod of President in June 2015.

Now this has become an effective tool in the hand of judiciary and the administration to nail
down the culprits that are responsible for hurting the Indian economy by circumventing the
tax rules and enforcement policies to create a parallel economy.

Let us have a look at what are the major highlights of this Bill and how it helps in our fight
against the menace of Black Money.

During the debate in the parliament it was suggested that the name of the Bill be changed
and its was subsequently changed to read as The Black Money (Undisclosed Foreign
Income and Assets) and Imposition of Tax Bill, 2015.

It will apply to Indian residents and seeks to replace the Income Tax (IT) Act, 1961 for the
taxation of foreign income by enforcing penal provisions for concealment of foreign income
and recommending criminal liability for attempting to evade tax in relation to foreign income.

The Bill has now disallowed the practice of agreements with other countries for granting
relief in respect of double taxation or for exchange of information to prevent evasion of tax
on undisclosed foreign income.

It also stops the government from entering into agreements with other countries for granting
relief in respect of income on which tax has been paid in India as well as the other country,
i.e., granting of relief from double taxation. Accordingly, a credit for taxes paid in the foreign
country in relation to undisclosed incomes / assets will not be available under the Black
Money Bill.

Page 7 of 51

One of the provisions of the Bill created a window for voluntary declaration (under the one
time window) of unaccounted assets. However a caveat has been added to make any
disclosure made by misrepresentation or suppression of facts as void and deemed to have
never been made.

Penal provisions

The Bill provides for huge financial penalties and stringent prosecution provisions for nonreporting of offshore assets and income.

A flat rate of 30% tax would apply to undisclosed foreign income or assets of the previous
assessment year.

To be applied from April1, 2016 it will have no exemption, deduction or set off of any carried
forward losses (as provided under the IT Act).

The penalty for nondisclosure of foreign income or assets would be equal to three times
the amount of tax payable, in addition to tax payable at 30%.

As per the provisions of the Bill, if Tax Return under the IT Act has not been filed for the
past assessment year(s) beginning before 1 April 2015 and the person has not availed of or
is otherwise not eligible to avail of Onetime Disclosure Window, then the person exposes
himself to a hefty penalty of Rs. 10 lakhs.

If the person concerned has filed the Tax Return under IT Act but has not reported
undisclosed foreign asset / income or furnished inaccurate particulars thereof, he also
exposes himself to a penalty of Rs. 10 lakhs.

Furthermore, if an undisclosed foreign asset was acquired before 1 April 2015 and if the
person concerned does not willfully file a tax return reporting the foreign asset within the due
date provided under Section 139(1) of the IT Act or if the person concerned files the tax
return but willfully does not furnish information relating to foreign asset where he is / was
connected (as owner or otherwise), he would expose himself to a rigorous imprisonment of
6 months to 7 years and fine. However this would not apply to an asset, with a value of five
lakh rupees or less.

The total undisclosed foreign income and asset of an individual would include: (i) income,
from a source located outside India, which has not been disclosed in the tax returns filed; (ii)
income, from a source outside India, for which no tax returns have been filed; and (iii) value
of an undisclosed asset, located outside India.

If a person fails to abide by the tax authority in (i) answering questions, (ii) signing off on a
statement, (iii) attending or producing relevant documents, he is to pay a fine between Rs
50,000 to two lakh rupees.

Since this bill is applicable to Residents (and not only to India Citizen) there is no
exemption for expatriates who may become residents by virtue of their extended stay so
they much watch out for compliance with this bill. Form henceforth expatriate employees,

Page 8 of 51

including their family members, qualifying as Ordinarily Residents, would also fall under the
Bills ambit.

Further, the new act provides that the tax recovery officer "can draw under his signature a
statement of arrears of an assessee and it shall not be open to the assessee to dispute the
correctness of any certificate drawn up by the officer on any ground whatsoever." This is
perceived to be excessively discretionary.

Some downsides of the Bills provisions

The clarification on the issue of resident is a bit ambiguous in nature. As per the definition
of the Finance Act, 2015 if a company has place of effective management in any year in
India, it would be resident and would be required to file a tax return in India under Section
139 and disclose all foreign assets and income. It needs to be clarified that for the past
years only the companies which were resident as per the definition of residence of
companies under the IT Act prior to the change in definition by Finance Act, 2015 would be
considered.

It is also contentious whether India will allow tax credit under the Double Taxation avoidance
Agreement if taxpayers do not declare foreign income and assets. A key concern is that the
Bills provisions can have unintended consequences covering bona fide cases or extending
its applicability to cases that may not be regarded as stashing unaccounted money.

Another concern could be around provisions for recovery of tax on the fair market value
and not the acquired value. This would mean that tax would need to be paid on the
unrealised appreciated value. Though there is no clarity as to at what stage such
determination will be done, by whom and the time period within which such determination
will be done for treating any declaration void. Such uncertainty and ambiguity could give
arbitrary powers to the tax authorities and may lead to misuse/ harassment even in genuine
cases where there could be inadvertent mistake on the part of the declarant.

There is no clarity as to whether the officials concerning enforcement of other laws will be
provided information and whether they will start proceedings against the declarants under
their respective laws. Immunity should be granted from all proceedings under all applicable
laws to make the immunity really meaningful and complete to encourage people to take
advantage of this onetime opportunity.

Safeguards

Some people had also argued that the tough provisions can be used to harass innocent
people and another draconian Bill like FERA was being pushed in the name if fighting black
money. To assuage these concerns the Bill has the following safeguards to ensure that the
innocent are not harassed:

Mandatory to issue notice and grant an opportunity of being heard;

Appeal to the income tax Appellate Tribunal and to the jurisdictional High Court;
Page 9 of 51

Taxpayer can also move Supreme Court on substantial question of law; and

Foreign accounts with minor balances not covered by law.

How it helps in fight against Black Money?

There are several provisions in this Bill that are new and unique and may help in curbing
generation and flow of Black money. Some of these are :

Under the new law, the manager of a company defined as per the provisions of the
Companies Act, 2013, will be liable for tax recovery. This is not allowed currently. Earlier,
only a company's directors (and not its managers) were liable for tax recovery. Many times
the Directors deny the knowledge about flow of funds and it becomes legally impossible to
pin them down as financial transactions in many firms are conducted by CEOs, CFOs and
other higher ranked officials. The new act now makes these officials also accountable about
wrong doings in the company.

Moreover, many bureaucrats lack the capability to lift the corporate veil and identify the real
beneficiaries of transactions that often go through many no-tax or low-tax jurisdictions,
better known as round-tripping of funds through a number of tax havens and also called
"treaty shopping". The new law blocks many of such leeway.

The Bill also makes concealment of income and evasion of tax pertaining to foreign asset a
predicate offence which will allow enforcement agencies to attach and confiscate accounted
assets held abroad.

The Bill also provides a compliance window for those who want to disclose their foreign
income/assets stashed abroad

The Black Money Bill will also put an end to fake transactions, tax evasion and undeclared
possession of property abroad using tax payers money

Limitations of the Bill

As far as bringing back the black money is concerned this law has very few ideas rather tha
voluntary disclosures. Given the high amount of penalty not many are likely to come
forward. Still the harsh punishment mentioned for tax evaders may work as carrot and stick
policy to scare some of the thin skilled culprits.

It has to be noted that money that has been illegally kept abroad by Indians are unlikely to
remain in the same place for long. Slush funds invariably move across jurisdictions rapidly
and after "round tripping" are "laundered" or "whitewashed" by the time they return to India.
In order to bring back black money stashed abroad, it is important to identify and block the
channels that facilitate the illicit flow of these funds. This law is not specific about them.

It is far from clear whether the new law against Indians holding funds and assets outside the
country in an illegal manner or the proposed new law on benami transactions will be
effective.
Page 10 of 51

Procedure to bring back Black Money has not been indicated in the Bill; it only prescribes
punishment for those caught with black money or compliance window for those who
voluntarily disclose their money/assets stashed abroad. More stringent laws are needed to
punish the practice of stashing black money.

The Bill also fails to provide a mechanism to retrieve information regarding the defaulters
which has agreements with foreign governments

Domestic laws and international treaty obligations blocking the detection of black money are
also not addressed in the Bill

The Bill also provides excessive powers to tax authorities without looking at the failure of tax
administration in the nation. This includes assessing officers, ED, CBDT and others

Enactment of the Act and its impact

The Income Tax Department started the enactment of the Act from July 1, 2015 and
consequently the 90 day window period to declare the undisclosed assets abroad was set
on or before September 30, 2015. It further states that all citizens having undisclosed
income must pay their taxes and penalty totaling 60 percent of the value of the undisclosed
asset by December 31, 2015.

According to the governments discourse a total of 638 declarations were received under the
compliance window declaring undisclosed foreign assets amounting to Rs. 3770 crore. This
amount was later revised to Rs. 4147 crore, while the number of declarations remained the
same. The single biggest disclosure was that of Rs. 200 crores.

With a total interest rates being 60% of the disclosed sums the Government gets to raise Rs.
2500 crores.

Though this sum was too less than expected, it has now started the process of taking
stringent measures against those persons that are still hiding the illegally earned money.

SIT recommendations on curbing black money

In the first week of September 2015, the Special Investigation Team on Black money
recommended several stringent steps to curb black money generation in the country.
Here is the gist of the recommendations by the SIT:

take action under anti-money laundering law for trade-based money laundering, putting a
cap on huge cash transactions as these mostly take place in illegal activities like drug trade
and betting deals.

need to check the generation of black money in the education sector and through donations
to religious institutions and charities.

Establishment of additional courts to established to decide the pending cases under the
Income Tax Act, establishment of Central KYC Registry and empowering the Directorate of
Revenue Intelligence under the Special Economic Zone Act.
Page 11 of 51

There is a specific recommendation to take steps to check generation of black money

through cricket betting.

The panel has also at length dwelt on the issue of money laundering through misuse of
exemption from long-term capital gains tax. It has recommended that capital markets
regulator SEBI needs to have an effective monitoring mechanism to study the unusual rise
in stock prices of companies when such an increase takes place

The IT wants SEBI to share the any such information with the Central Board of Direct Taxes
and the Financial Intelligence Unit (FIU). It also said the Enforcement Directorate should
then be informed to take action under Prevention of Money Laundering Act for the predicate
offences.

As far as participatory notes are concerned, the panel has said obtaining information on
"beneficial ownership" of these instruments is of crucial importance to prevent their misuse.
P-Notes are instruments issued by registered foreign institutional investors to overseas
investors, who wish to invest in the Indian stock markets without registering themselves with
market regulator SEBI. These have been controversial as there are doubts it is the illegal
money that is finding way back into India though these instruments.

The SIT has said the value of P-Note investments as of end February 2015 was at Rs 2.72
lakh crores. The top five countries from where P-Notes investments be beneficial are
Cayman Islands, he US, the UK, Mauritius and Bermuda. According to the report, SIT noted
that at Rs 85,000 crore, Cayman Islands accounts for the biggest portion of P-Notes
investment. It wondered a small country with just 55,000 population managed to invest such
a huge amount in Indian shares.

November 2015 Report

The SIT came out with another set of recommendations in November 2015 in its third report
in which it also found that as many as 2,627 persons were holding directorship in more than
20 companies, in violation of the Companies Act, and has recommended action against
77,696 companies involved. Further 345 addresses were found to have at least 20
companies operating from the same address and the total number of companies sharing
their address with at least 19 more companies was 13,581.

The SIT said that the current provisions on address-sharing must be changed to block
rerouting of money.

It also suggested detection of creation of shell companies and deterrent penal action against
persons involved in such activities. The shell companies are referred to those entities which
are incorporated as companies and are used only for routing funds, without undertaking any
real business activity.

The SIT further observed that in many cases of creation of shell companies, the
shareholders or directors are persons with limited financial means like drivers, cooks or
other employees of those who intend to launder black money. Since these persons are of
very modest means, upon investigation, they tend to leave the business and migrate from
Page 12 of 51

the city. This is one of the reasons for a proportion of income tax arrears attributed to
'assessee not traceable'.

The SIT asked the Central government to frame rules at the earliest, to provide for the
manner of holding and disclosing beneficial interest and beneficial ownership.

The report added that primary method of generation of black money remained suppression
of receipts and inflation of expenditure. The tax-payers also try to inflate expenses by
obtaining bogus or inflated invoices from 'bill masters', who make bogus vouchers and
charge nominal commission.

The SIT has red flagged some pointers such as common director identification number (DIN)
in multiple companies, companies with same address, same contact numbers, use of only
mobile numbers, sudden and unexpected change in turnover declared in returns etc. as
trigger for investing possible frauds.

Page 13 of 51

One Rank One Pension

The issue of One Rank, One pension (OROP) is demand of the retired veterans of our
armed forces for reinstatement same pension, for same rank and for the same length of
service, irrespective of the date of retirement. This would give financial stability to retired
personnel who have given their prime years of youth for the service of nation often in
perilous and hazardous conditions.

Contrary to the more prevalent notion it is not a new demand as the OROP was very much
part of the services terms and conditions in the past before it was done away with in 1970s.

Technically speaking an OROP rule means that retired soldiers of the same rank and length
of service will receive the same pension, regardless of when they retire. As of now, the date
of retirement determines the amount of pension. With each Pay Commission coming up with
its recommendations every 10 years, the military veterans who retire early, receive less
pension as compared to those who retired later with the same rank and length of service.

Implementation of OROP will benefit those ex-servicemen who retired before 2006. As of
now those pensioners who retired before 2006 draw less pension than their counterparts
and even their juniors. The scheme will benefit all three services -- air force, navy and army.

The points in favour of reinstating OROP

A main argument in favour of OROP is that unlike many other services Jawans and officers
of Armed forces retire early. The average age of retirement is about 40 years, whereas a
civilian can continue in service till the age of 60. So the salary, based on which the pension
is decided is very less when compared to those who retire at the age of 60.

Again due to short timeframe of the service the savings of these personnel are also very low
and thus they are financially handicapped. OROP will be beneficial in this situation as it will
boost their financial stability.

Though there are several provisions for absorbing the retired personnel in civilian areas yet
almost 60% of the Jawans are not absorbed due to lack of quality education. Most of them
are either 10th or 12th pass and finding jobs in areas other than private security forces is
tough for them. Here too the rising unemployment means that younger people work for far
less salary than retired personnel. So only supervisor rank posts are suitable for them which
further limits the job opportunities.

Again unlike other services the Armed forces work in very tedious working atmosphere
which quickly drains their energy. By a time a retired armed force personnel reach the age
of 50 his ability to work is reduced drastically. Though they have a well toned body but lack
of army discipline and quality nutrition drains them quickly. So they need better care at
advanced age where injuries sustained during their career start to resurface. OROP will
ensure that they are able to take care of their body in a suitable way.

Page 14 of 51

The defence veterans argue that the salary that is paid to them is not in the tune of risks
they take. This they says is the reason why less number of youth want to join Army today.
Adequate pay and satisfactory retirement benefits are thus necessary to keep defence
forces motivated and for defence career to remain attractive for the Indian youth.

Another argument is that the rank and promotion of defence personnel is not in line with civil
personnel. In other words, defence personnel feel that they are short-changed in the larger
government system.

Points against OROP

One of the biggest reasons why the Central government discontinued the OROP in 1973
was that it is very expensive and puts a huge financial burden on the government. Also this
is not a onetime affair and cost will keep on increasing as one pay commission succeeds
another.

The legal argument states that the person who retired 50 years ago cannot be paid the
same pension as someone who retired now.

Also according to OROP, the veteran who served as colonel for 5 years will get the same
money as someone who served in the same post for 2 year. This is the most important legal
challenge before OROP.

Implementation of OROP for the armed force personnel can open a Pandoras Box where
other personnel starting with the paramilitary forces and police personnel - will also start
demanding to put them within the folds of the OROP. Though their service terms are not
same as of the Armed forces still acceptance of OROP may give them an excuse to raise
demands. Given the perilous condition of our national security the government may find their
demands hard to ignore.

Besides arguing that police officers who have retired in 2006 are drawing less pension than
junior officers who retired after 2006, the police are of the view that since they are the ones
who battle terrorists, insurgents and naxalites, their threat perception is higher. They also
have a high casualty rate as more than 3,000 police personnel died in 2014 alone while in
contrast, 201 soldiers and officers of the armed forces were killed between 2012 and 2015.
Their contention is that OROP for police personnel will serve the dependents and disabled
personnel in a better way.

Opponents of the OROP suggest that armed force personnel are already provided separate
military service pay, field area allowance, counter insurgency allowance, high
altitude/uncongenial climate allowance, Siachen Glacier allowance, flying pay, parachute
pay, special forces pay, etc. In addition, defence personnel get various benefits that are not
accorded to their civilian counterparts, such as dedicated army hospitals, army schools,
army colleges, subsidised food and beverages, etc. Also, defence personnels children have
a quota or are given preferential treatment in admission to various institutions. Thus, the first

Page 15 of 51

argument that armed forces personnel are not paid adequately is really not tenable and
giving them added benefit of OROP is thus not justified.

Additionally the argument that OROP is a just cause because everyone at the same rank
should get the same pension is also not entirely true. Over the last few decades, we have
witnessed the time to rank has changed substantially. For instance, in the 1980s, the timescale of service required to attain the rank of a full colonel or to pick up a colonel-equivalent
rank was over 20 years, which has, in recent times, reduced to 15 years. Therefore, the
relationship between rank and years of service itself has changed over the last few decades.

In addition, the rank and promotion of armed forces is largely decided internally and
outsiders including the government of India - cannot be blamed for discrepancies. It is
almost for certain that the government is not responsible for financial compensation for any
discrepancies for which it is not held responsible.

The recent agreement on OROP

However despite the ongoing debate about the feasibility of OROP, the NDA government has
bowed down before the agitation of the veterans the Government announced in the first week of
September 2015 that it has decided to reinstate the OROP.
Who may be eligible for OROP now?
As per the agreed upon definition of OROP it "implies that uniform pension be paid to the Armed
Forces personnel retiring in the same rank with the same length of service, regardless of their
date of retirement. Future enhancements in the rates of pension would be automatically passed
on to the past pensioners. This implies bridging the gap between the rate of pension of current
and past pensioners at periodic intervals".
The major announcement made this time under the "OROP Scheme" is as follows :1. The benefit will be given with effect from 1st July, 2014. The veterans were demanding that
it be done w.e.f. April 2014 but given the significant outcomes of OROP this is a minor
irritant.
2. Arrears from April 2014 onwards - will be paid in four half-yearly installments.
3. A key issue regarding widows, including war widows, was also solve and they will also be
eligible for OROP and additionally their arrears will be cleared in one installment
4. To begin with, OROP would be fixed on the basis of calendar year 2013. Pension will be refixed for all pensioners retiring in the same rank and with the same length of service as the
average of minimum and maximum pension in 2013. Those drawing pensions above the
average will be protected.

Page 16 of 51

The issue of premature retirement

In the first draft of agreement it was mentioned that personnel who retired voluntarily will not
be covered under the scheme. However it was later brought to the notice that in Army there
is no such thing as voluntary retirement, as the Armed Forces do not have a VRS policy.
Instead armed forces have a tradition of premature retirement (PMR).

It is also to be mentioned that to avail pension, and PMR, Armed Forces officers must have
completed 20 years of service, and soldiers 15 years service; and unlike VRS, PMR
invariably has a reserve liability, i.e., they can drafted back into service by the government if
the national situation so demands. Later on it was announced that all pensioners including
those who took premature retirement will be covered by the OROP scheme.

Financial Implications of OROP Implementation

It is being estimated that the expenditure on account of OROP should cost between Rs.
8,000-9,000 crores. Arrears will add up another Rs 12,000 crore. Thus the outgo in this
financial year (assuming disbursement of two half-yearly installments of Rs 3,000 crore each
and the widows' full pension) would be around Rs 18,000 crore. The overall annual pension
budget is currently Rs 54,000 crore. The recurring extra annual outflow of Rs 10,000 crore
(excluding arrears) thus represents a manageable increase of 18 per cent.

However a key aspect of OROP rollout is that the ratio of military pensioners to serving
military personnel is currently 1.7 to 1 which is very high in comparison the ratio for civil
pensioners to civil work force which is 0.56 to 1. To reduce this anomaly the 6th Central Pay
Commission urged the Government to absorb Armed Forces personnel after their military
engagement in Civil Government organisation including Police Organisation as is the
custom in many countries,

As per the 6th CPC findings the Indian Para Military Forces have a combined annual intake
of around 35,000 personnel; in comparison Armed Forces personnel (Army, Air Force, and
Navy) pensioned off every year are approximately 40,000. Even if 30% of annual intake is
diverted to armed forces it will save a huge sum of money. For this the 6th CPC
recommended that in future posts in the "CPOs/defence civilian organisations" should be
filled by lateral transfer of Armed Forces personnel, including Short Service Commissioned
Officers, after they complete their term of military service.

The 6th CPC estimated that the "at the end of 13 years the annual savings" from transferabsorption of Armed Forces personnel to civil departments, including police, "will be to the
tune of Rs. 7,800 crore at constant price index". Lateral transfer- absorption, in the longer
term result in savings in the overall pension bill, and would more than offset projected
expenditure on OROP.

Page 17 of 51

Issues that remain

A key contention that still remains is the governments proposal for provision for revising
OROP every five years to equalise pensions with ranks. The veterans say this will lead to
anomalies during the stretched five-year period and want an annual revision.

The government on the other hand maintains that an annual equalisation will be an
administrative nightmare for an average benefit to veterans over five years of around Rs 33
crore a year - or Rs 40 per month on average per veteran. Thus the administrative cost
could be more than the extra funds disbursed. It is more likely that a bi-annual revision may
take place.

Furthermore all stakeholders agree that despite basic agreement the roll out of OROP
remains a complex issue.

A thorough examination of interests of retirees of different periods and different ranks is

needed.

The inter-service issues of the three forces also require consideration.

Keeping all this in mind a decision has been made to constitute "a One Member Judicial
Committee", which will do a "thorough examination of interests of retirees of different periods
and different ranks" and consider "inter-service issues of the three Forces". The Committee
will give its report in six months.

7th Pay Commission report on OROP to other services

The 7th Pay commission also recommended some measures that can result in extension of
'One Rank One Pension' (OROP) for all. It has recommended a revised pension formulation
for employees of civil government, Central Armed Police Forces, as well as defence
personnel to bring "parity between past pensioners and current retirees with same length of
service", retiring before January 1 next year.

This formulation will bring about parity between past pensioners and current retirees for the
same length of service in the pay scale at the time of retirement.

According to the 7th PCs report the past pensioners shall first be fixed in the pay matrix
being recommended by the Commission on the basis of pay band and grade pay at which
they retired, at the minimum of the corresponding level in the pay matrix. This amount shall
be raised to arrive at the notional pay of retirees, by adding number of increments he/she
had earned in that level while in service at the rate of 3 percent.

In the case of defence forces personnel, this amount will include military service pay as
admissible.

Page 18 of 51

Gold Monetization Scheme

Basic idea behind GMS

Other than crude oil, Gold import has been a substantial cause of worry for Indias financial
managers. There are two aspects of gold imports. One is the demand for domestic
consumption as Indian women take special fancy in collection of gold jewels. Again Indian
households consider gold as safe investments that does not lose value over a period of
time.

The other aspect of gold imports is for consumption in Indias gems and jewelery industry
where gold is considered as basic ingredients. Since this is a major avenue for our exports,
the government can not ban import of Gold as it hurts our economic prospect.

However the hoarding of gold in common household has resulted in an economic double
whammy as most of the money saved as gold remains sitting idle. As per the latest
estimates gold worth up to Rs 60 lakh crore are held by households and institutions. This
hurts the economy badly.

If this gold is freed up and supplied to the jewelry manufactures it will help the government in
curbing the gold imports while insulting the gems and jewelry industry from its adverse
impact.

The recently launched Gold Monetization Scheme is an attempt in this direction only. Via
this scheme the depositors can deposit gold in banks and can earn interests on it while
keeping their investment secure.

Major provisions of the scheme

Under this scheme Individuals and institutions can deposit as low as 30 gms of gold.

Interest earned on it would be exempt from income tax as well as capital gains tax .

Those willing to deposit the gold will be given a certificate mentioning the amount and purity
of the deposited gold. Banks will open a 'Gold Savings Account' on the basis for such
certificates.

Gold collected from consumers will first be cleaned and measured at test centres; it would
then be melted to test for purity. After the tests, consumers can either deposit the gold for a
fee or take it back after paying a nominal fee.

Consumers will be paid interest on their gold savings account after 30/60 days of account
opening. The amount of interest rate to be given is proposed to be left to the banks to
decide.

Both principal and interest to be paid to the depositors of gold, will be 'valued' in gold. For
example if a customer deposits 100 gms of gold and gets 1 per cent interest, then, on
maturity he has a credit of 101 gms. That means that if there is any appreciation in the rate
of gold the customer will automatically gain from rise in prices.
Page 19 of 51

The customer will have the option of redemption either in cash or in gold, which will have to
be exercised in the beginning itself (that is, at the time of making the deposit).

The tenure of the deposit will be minimum 1 year and in multiples of one year. Like a fixed
deposit, breaking of locking period will be allowed.

Benefits of the scheme

As per the estimates there are some 20,000 tonnes of gold ornaments lying idle in the
country while the annual consumption of gold in the country is around 800-1,000 tonnes
only. Even if 2 to 4 percent of the idle gold is converted, it can ease up the burden of gold
imports and can save valuable foreign currency.

It will increase cash liquidity in market and boost economy.

Since the scheme talks about liquidating the Gold collected through the scheme, the same
can be available to jewelers for manufacturing of new jewellery and other items. Since
Gems and Jewelry exports are vital item of our export menu it will help the traders from
depending upon fluctuation of rate in the global market.

Again it is being seen that despite being lured by the attractiveness of the Yellow metal the
new generation has not been able to cope up with security related hassles of gold. Poor law
and order conditions in many states have forced the people to keep their ornaments in safe
lockers and they pay money to use these lockers. Finding a place to secure them and earn
interest can be a lucrative proposition for such individuals.

As far as the bigger picture of the economy is concerned, it is proposed that Banks may be
permitted to deposit the mobilized gold as part of their CRR/SLR requirements with RBI.
That will increase money flow in market.

Banks may sell the gold to generate foreign currency. The foreign currency thus generated
can then be used for onward lending to exporters / importers.

Bank may convert mobilized gold into coins for onward sale to their customers

Challenges to implement Gold Deposit Scheme

However as they say all that glitters is not gold, despite having obvious advantages the scheme
is proving to be a hard proposition to sell and harder to implement. After the Scheme was
officially launched by Prime Minister Modi in November 2015, only 400 gms of gold were
deposited in the first two weeks of the scheme. Though much of it can be blamed on low
awareness about the scheme, yet there are several fundamental flaws with the scheme itself.
Here are few downsides of the scheme which may hamper the execution of this scheme.

First of all Banks will have to keep in place facilities to verify purity of gold via opening
verification centers. As of now most of them lack expertise to assess the purity of gold.
However as several banks have started Gold Loan Schemes, they are putting in place a
Page 20 of 51

rudimentary set up for value assessment of the gold. The scheme can be kick started with
the help of these branches. The latest estimate puts the number of such branches in access
of 2000. That is a fair enough base to start with

The next big challenge is transportation and storage of Gold. It will not be easy to find quick
disposal of melted gold. Initially traders will have their own apprehensions regarding gold
collated via this scheme. To have a suitable place to store gold will be troublesome for the
banks.

Most of consumers do not hold bills/invoice of gold purchases. A large amount of it is in

shape of gifts by family members and relatives at the time of marriage and other festive
occasions. The institutions like temples and trusts own entire collection made of donations.
It will be very hard to identify their origins. This may discourage many to monetize the
physical gold. Banks will be surely asked to meet its KYC (Know your Customer)
requirements while opening Metal accounts. Relaxing these norms may result in conversion
of black money in gold.

Another big hindrance is the emotional bonding associated with gold ornaments. Since
much of this is valued as proud possession of families, many of the customers will not be
comfortable with melting of ornaments gifted by someone beloved or gained after so much
pain in saving money. They will ideally want their own piece of ornaments back which will
defeat the whole purpose of scheme.

Again the purity of household gold is quite questionable. As per governments own
estimates 75% of the non-hallmark jewelry in India is in the range of 60 to 80% in purity
terms. So the customer depositing ornaments worth 100 gms may be shocked to know that
it is actually worth 70 gms only. Then paying up making charges usually around 5 to 6
percent of value of gold at at the time of disbursement can be added burden. So if the
government pays up around 2 to 3 percent of interest only, a deposit of less than three
years will be non- lucrative for the common household investor.

The common Indian sees gold as something which can be liquidated easily in the times of
crisis. The government will have to ensure that the penalty charges while breaking the
deposits are not too much. Again if the government can link gold loan scheme to gold
monetization of scheme, it can still find the common customer lapping up the scheme
despite the hindrances given above.

Economic burden of the Gold imports

India is reportedly the 3rd highest consumer for gold in the world. We consume almost a
quarter to a third of worlds annual gold demand. On the other hand our own gold production
is very low as there are just one or two active gold mines in our country.

The net result is that 95% of our annual gold demand is met by imports. Annually, we import
anywhere between 800-1000 tonnes out of this, around 350 tonnes of gold is in the form of
coins/bars.
Page 21 of 51

In recent times, as the gold prices are tumbling across the globe, our appetite for the Yellow
metal has increased. In 2014-15, India imported gold worth $34 billion. Value of imports
peaked in 2011-12, when India imported gold worth $57 billion, even as gold prices rose to
record high in the global and domestic market. Just before the draft guidelines for the Gold
monetization scheme were issued the gold imports had more than doubled to 125 tonnes in
March 2015 from 60 tonnes in the same period a year ago.

Despite several restrictions put by the previous UPA government and the current regime as
well, Gold imports in the fiscal year 2014-15 ended March 31 jumped to 900 tonnes, up 36
percent from a year ago. If the trends continue it is expected to cross 1200 tonnes this year.

The conventional economic wisdom says that as gold is losing its sheen as a safe
investment (it has been down by around 25% since its high in 2012), the demand should go
down. But this has not happened. So there seems to be some other forces working. The
traders are hoping that prices will go up in near future and thus may be hoarding it.

A similar mindset may be propelling the gold-hungry middle class to gobble up more gold
and thus creating a vicious cycle of unproductive investment in the country. A more simple
explanation here is that people may now be living out their fantasy to own gold as jewelry.

In 2012-13, the ratio of jewellery demand to investment demand was 62:38, which changed
to 66:34 in 2013-14. But in 2014-15, investment demand fell significantly, with the ratio at
79:21. This may also be possible due to lower inflation and availability of extra cash in the
hands of middle classes.

As of now it is not hurting too much given the low prices of crude. But if they rebound as well
say more than $85 per barrel, Gold which is the second-highest imported item by value
in India alongside the crude imports can create a wide current account deficit which in
2013 sparked the worst currency turmoil since a 1991 balance of payments crisis.

Certainly the government so concerned about fiscal management - cannot allow it to

happen again. In 2014-15, for instance, India exported goods worth $310 billion, but
imported goods worth $448 billion, resulting in a trade deficit of $138 billion.

If the import of gold had been much lower than $34 billion, the trade deficit too would have
been narrower. Crude is an essential commodity and virtually runs our economy. Gold is not
in the same league. Therefore, it becomes imperative to contain imports of gold even as the
country attempts to grow its exports.

To illustrate a fact here the gold import in FY 11 was 1004 tonnes, 919 tonnes in FY 12, 845
tonnes in FY-13, 845 tonnes in FY-14, and 945 in FY-15. So with right measures we can
restrict the import to around 700-800 tonnes in FY16 which should be in the comfortable
range.

Page 22 of 51

Import vs. Export dilemma:

A veiled criticism of the Governments attempt to curb Gold imports is that they may prove
counterproductive. As jewelry exports still remain a robust activity in India, the current spurt
in Gold imports may be due to the cause that the exporters were sitting dry due to curbs
imposed in 2014 and went gung-ho when the same were lifted.

Again relaxation of 80:20 rule (under this rule importers are mandated to export 20 percent
of all gold imports) may also be a reason to boost imports. This rule was introduced in
August 2013 together with a duty of 10%, at a time when the trade deficit had touched a
record and gold imports had been surging. At that time the deficit had touched a record high
of 4.7% of gross domestic product (GDP) at $87.8 billion in 2012-13. Helped by the curbs on
gold imports, CAD dropped to 1.7% of GDP, or $32.4 billion, in the fiscal year ended March
2014.

The industry experts are also pointing out that gold exports in various forms are estimated to
have increased about 20 per cent compared to 2013. Therefore, the numbers are to be
viewed on net terms, not gross terms.

Though the Gems and Jewellery Export Promotion Council (GJEPC) had reported a decline
in Gem and jewellery (G&J) shipments - accounting for nearly 13% of Indias overall
merchandise export marginally by 0.62% in FY15 (refers to the period April 01 to March
31). The overall export of gems & jewelry was reported at US$ 39.89 billion as compared
with US$ 40.14 billion for FY14.

Another GJEPC report marks that export of gold jewellery for FY15 increased to US$ 9.85
billion from US$ 8.36 billion in the previous year, registering significant growth of 17.74% yo-y; albeit on a lower base. This increase was mainly attributed to improved supply of gold
due to regulatory easing in H2FY15 and increase in demand for Indian products from major
consuming countries like US, Russia, UAE, Hong Kong and East Asian countries.

All this was achieved at time when gold imports were severely restricted. Clearly there is
much demand for Indian gold jewelry in the international market and unduly capping the
import without providing alternatives for gold procurement can be harmful for the industry.

Herein lays the importance of Gold Mozetization scheme. It will save the Indian Gems and
Jewelry industry and will also be able to reduce dependence on imported gold. The
government must work on this to make it a success.

Page 23 of 51

Real Estate Regulation Bill

Housing is among the original three requirements of a civilized society i.e. Roti, Kapda aur
Makan. While the first two items are available to all Indian citizen in more or less quantity,
availability of Makan (house) has become difficult for even those who fall in the middle
income group.

The unregulated growth of the real estate sector in the urban areas has made cost of
owning a house too much steep. Even after people manage to save sufficient money to buy
a property the lax regulation in the housing sector often encourages frauds, delays and poor
quality housing for common folks.

On the other hand the real estate sector is also a very important component of our economic
system. As of now this sector with a huge multiplier effect on the other sectors of economy
- is easily seen as a big driver of economic growth.

As of now it is the 2nd largest employment -generating sector after agriculture. For the most
1990s and 2000s its growth rate was in double digits and as of now it contributes about 56% to Indias GDP. Not only does it generate a high level of direct employment, but it also
stimulates the demand in over 250 ancillary industries such as cement, steel, paint, brick,
building materials, consumer durables and so on.

Problems of the Real Estate Sector

The sector witnessed an unprecedented boom after UPA governments decision to allow
FDI in this sector in 2005. Following this decision the sector not only witnessed entry of
many new domestic realty players but also the arrival of many foreign real estate investment
companies including private equity funds, pension funds and development companies
entered the sector lured by the high returns on investments.

However after 2008 economic crisis the flow of funds dried out and the situation has not
changed even after several other sectors have been able to come out of the quagmire.

Since then and particularly after 2012 this segment has been going through various
phases of crisis. Dip in demand for housing sector and a weak economy has resulted in
sluggish sales across the country. The absorption rates in realty hubs like Dehi NCR and
Mumbai have come down by about 30% and Mumbai alone has to bear the burden of
around 80,000 unslod units.

Launches have plummeted by 50% in most of the cities in 2012 as well. Overall the real
estate segment has been crying for an overhaul.

Raising funds has been the most difficult challenge for the real estate projects. Indian real
estate projects have suffered from plummeting inflow of funds. The inflow has been hurt by
Eurozone crisis and low performing global economy. While foreign direct investment (FDI) in
real estate was about Rs 1,58,490 million in present value in 2009-10, it has come down to
Rs 39,474 million in 2011-12. Since the real estate sector is a time-taking investment portal
the fund managers seeking a quick recovery after 2008 crisis have silently opted to neglect
the real estate sector.
Page 24 of 51

These projects are also capital and labour intensive. Rising inflation in the last few years
hurt it badly as both material and labour cost spiraled up. Many projects that were launched
on the basis of a 5% projected inflation soon ran out of funds as inflation breached 10%
mark. It has stalled various ongoing projects and also bottlenecked the upcoming ones.

These events have had a domino effect because after number of defaulters (those who
could not pay the money back as projects got delayed) increases, commercial banks (who
are now the only source of funds) became more restrictive in lending money to the
developers. Developers adopted innovative ideas to lend money from small investors at
ridiculously high rate of interests which again pushes up property prices. As a result, prices
go above the buyers range, making it difficult for the units to get sold.

Another big problem before the sector is unrealistic planning in development of the projects.
While many high scale projects are unsold, there is a huge gap between the demand and
supply of affordable homes across the country.

According to Ministry of Housing and Urban Poverty Alleviation estimates the urban housing
shortage in the country to be 24.71 million at the end of the 10th Five-Year Plan. Although
the demand is highest for the range of Rs 15-24 lakh, there is a dearth of affordable homes
in the country. Of the total shortage of homes, 88% account for the economically weaker
section (EWS), while 70% of the unsold inventory is in Rs. 50 lakh plus segment.

Clearly the developers need to find a way where there projects can be affordable and
tailored to market demands. Till now the industry has followed a weird theory that consumer
will be forced to buy a house he cannot afford because supply of affordable houses is thin.
Although it helped developed in pocketing good profit in the early days, the bubble seems to
bursting now.

Thankfully, recent allowance of external commercial borrowing in to the affordable housing

brings in a sign of relief to the developers. It opens up avenue to the developers who are
constructing affordable homes to avail loans at lower interest rate.

Last and not the least of the big problems being faced by the industry is lack of
transparency. Land encroachment, lack of regulation act as a deterrent to foreign investors
looking to invest in Indian realty. Many projects are facing legal hassles due to greed of
developers. Unrealistic prices have also created perception that demand for real estate is
being driven by black money economy. Delay in projects (whatever be the reason) has
resulted in loss of face value both in the eyes of consumers as well as investors. Nobody
wants to be part of a shady industry whose actions fallible to legal challenges. A regulatory
authority to overlook all these issues is thus needed as soon as possible.

RERA

Thus we have a very unique situation wherein despite there being a huge demand for
houses, the industry is struggling to sell its products. Clearly it needs some kind of outside
involvement to solve this dilemma.

Page 25 of 51

The Real Estate Regulation Act is a step towards this process only. However before we look
into the provisions of the Bill and how it helps the Real Estate segment, let us have a look at
some of the major challenges faced by it.

The first attempt to formulate such a Bill was made by the previous UPA government however
as it was introduced in late 2013, the 14th Lok Sabha could not complete the process of setting
up a real estate regulator. After coming to power the new NDA government has now introduced
several amendment to the Bill.
The salient features of the Bill are as under:

The Bill is applicable to both residential and commercial real estate projects

It calls for establishment of one or more Real Estate Regulatory Authority in each State/
Union Territory (UT), or one Authority for two or more States/UT, by the Appropriate
Government for oversight of real estate transactions,

To appoint one or more adjudicating officers to settle disputes and impose compensation
and interest;

Following the passage of the Bill registration of Real Estate Projects and Registration of
Real Estate Agents will be mandatory. Any project developer or real estate agents who
intend to sell any plot, apartment or building, will need to enroll with the Real Estate
Regulatory Authority;

All the details regarding new projects will fall under mandatory public disclosure norms.
These details will include details of promoters, project, layout plan, plan of development
works, land status, status of statutory approvals and disclosure of proforma agreements,
names and addresses of real estate agents, contractors, architect, structural engineer etc.
Any diversion from the details furnished with the regulator will be unacceptable.

Project registration has to be done online and will get deemed approval in 15 days. The
regulator will then allot a login-ID for the project until which a builder cannot start selling. The
regulator will subsequently scrutinise all documents pertaining to the project and can cancel
the registration if he thinks they are not in order.

Following the passage of the Bill it will be mandatory for the promoters to adhere to
approved plans and project specifications. He will be fully responsible obligations regarding
veracity of the advertisement for sale or prospectus. Any discrepancy herein will be penal.
He will also have to rectify structural defects (if asked by the regulatory authorities) and will
be asked to refund money to the consumers in cases of any default.

The new Bill bars the promoter from altering plans, structural designs and specifications of
the plot, apartment or building without the consent of two-third allottees after disclosure.
However, minor additions or alterations permissible due to architectural and structural
reasons but they must be vetted by expert proclamations.

It has been made compulsorily to deposit 50 percent (or such lesser percent as notified by
the Appropriate Government) of the amounts realized for the real estate project from the
Page 26 of 51

allottees in a separate account in a scheduled bank within a period of fifteen days to cover
the cost of construction to be used for that purpose.

The real estate agents thus far have been free of any kind of responsibility. Promoters were
somehow held accountable in various cases but agents did not need to worry at all. The
new regime will change this. Now only the real estate agents registered with the Authority
will be allowed to sell properties. They will have to maintain books of accounts, records and
documents along with details of payments, commissions paid as well as received. They
need to make sure that they are not involved in any kind of unfair trade practices and do not
try to dupe the customers beyond the developer/promoters brief.

The Bill also points out certain rights and duties of Allottees i.e. customers. They will
henceforth have right to obtain stage-wise time schedule of project and claim possession as
per promoter declaration. They will be entitled for refund with interest and compensation for
default by the promoter provided that allottees are able to to make payments and fulfill
responsibilities as per agreement.

The Bill asks for the Authority to act as the nodal agency to co-ordinate efforts regarding
development of the real estate sector and render necessary advice to the appropriate
Government to ensure the growth and promotion of a transparent, efficient and competitive
real estate sector. Its area of activities includes ensuring fast track dispute resolution
through adjudicating officers (District Judge) and appellate Tribunal to hear appeals;

It will work for establishment of Central Advisory Council to advise the Central Government
on implementation of the Act, recommend policy, protection of consumer interest and to
foster growth and development of the real estate sector.

Finally a Real Estate Appellate Tribunal (on the lines of TDSAT) will be established to hear
appeals from orders of the Authority and the adjudicating officer. The Appellate Tribunal is to
be headed by a sitting or retired Judge of the High Court, with one judicial and one
administrative/technical member.

The Bill includes punitive provisions such as de-registration of the project and penalties in
case of contravention of provisions of the Bill or the orders of the Authority or Tribunal.
Failure to register a project will cause the developer to attract a penalty of 10% of the overall
project cost, and an additional penalty of 10% penalty and/or a 3-year prison term in case of
continued non-compliance. Incorrect or incomplete disclosures will attract a penalty of 5% of
the project cost. Project cancellation has been stated as possibility in case of continued noncompliance.

It also holds a provision for barring jurisdiction of court and any authority from entertaining
complaints in respect of matters covered under the Bill;

How will the proposed changes impact the Real Estate Sector?
Here are the key takeaways from the analysis of likely impact of passage of Real Estate
Regulatory Authority Bill.

Page 27 of 51

As of now there has been no regulation for keeping the funds of any projects restricted to
that project only. It led to massive diversion of funds as customers money was only source
in the last few years. In the Bill vetted by the UPA regime as provision was made for
restriction of 70% amount from being diverted. It choked up the funds flow entirely and was
proving to be counterproductive. Now it has been amended to 50%. Experts fear that this
20% grace will effectively allow developers to continue their practice of diverting funds.
However, the 50% mandate will still place enough restriction on developers to divert funds
elsewhere and ensure better completion records. It will be obviously better than what has
been happening in the past. Once investment from other sources starts pouring in, it can
again be raised to 70% or higher.

Another big relief is inclusion of commercial projects under the purview of the Bill, it will
provide protection to investors of commercial assets, as well. Till now Courts were loathe in
hearing out the complaints of commercial space buyers as humanitarian angle was missing.
Now this will change as well.

The Bill is not restricted to new projects only. All under-construction projects need to be
compulsorily registered within three months of setting up of the regulator, and developer
cannot make changes to original plans or the structural design unless he gets the consent of
2/3rd of the customers. This can give immediate relief to millions of customers how are
feeling the ill-effect of a non-regulated regime.

One issue pointed out in the earlier version of the Bill by stakeholders was that it aimed to
place itself as the sole course of action for redressal of grievances by customers, with no
recourse to other consumer forums. It was correctly pointed out that such a stance could
lead to pressure on this regulatory body in terms of an increased log of cases, though it
would certainly reduce instances of multiplicity of suits. This clause has been done away
with in the version that the cabinet has cleared, so customers can now seek recourse with
consumer courts and forums as well.

As far as the developers are concerned the new Bill will provide them an aura of
authenticity. They will be able to claim a transparent system overlooked by a regulator.
Clamping down on dubious real estate agents may increase one-to-one relations between
developers and consumers leading to a more customer oriented project development scene.

All this will instill more confidence among global investors, thus providing better access to
structured capital for this sector. Better funds of flow may also lead to lower property prices
to a certain extent as rate of interests offered by institutional lenders (4 to 6%) are far below
the existing sources (8 to 10%) of funding.

Under the provisions of the Bill buyers can claim refund with interest and compensation if
promoters fail to deliver projects in time. However this payment will only be made to those
customers who have made payments via proper monetary transactions. In fact builders
often demand part payment in cash, making many ordinary buyers party to corruption. The
Bill will help curb undeclared "black money" in property markets that costs the government
billions of rupees in lost taxable income.
Page 28 of 51

Again under the new regime every flat/apartment/office/shop etc. will be accounted for
ownership can be traced easily. People owning multiple properties can be easily singled out.
This will discourage creation of false demand-supply chains which are linked to
unrealistically high prices of real estate.

This will also make new projects user friendly as they now need to follow every law of land
to get approval from the authority and diversion from the stated plan will not be easy. The
days of duping the customers may be over soon.

Page 29 of 51

Power Sector Reforms: The Next Step

If we have to name a single biggest impediment associated with Indias growth story 8 out of
10 experts will point to our dismal record on reforming the power sector. Even at a low
annual per capita power sector consumption of approx. 800 kWh, the supply has never been
adequate with long hours of power cuts (even in metros) being a routine affair.

Even after pursuing the ambitious Rajiv Gandhi Vidytikaran Yojana for about a decade, the
World Banks June 2014 report said that about 25% of our population remains without
power. Even those who have access to electricity have to make do with the uncertainty of
power supply, thus resulting in massive unsatisfied demand and restricted consumer
welfare.

Still in the more recent times the situation of availability of power has improved. Now the
crisis has shifted more towards distribution and management of power (and also towards a
viable energy mix) rather than just augmenting the power production capacity.

In the course of this article we will discuss all these areas related to power reforms, however
let us first have a look at the real-time situation of Indias power sector.

Generation:

India had 188,898 megawatts (MW) of installed power capacity at the end of March 2015.
Representing a growth if 10.8% over the previous year.

Thermal power comprised of coal, natural gas and diesel still accounts for more than 80% of
Indias power generation out of which Coal alone accounts for more than 60%. The acute
shortage of coal has been a sordid saga of Indias power sector and even when we pin our
hopes on Ultra Mega Power Plants (UMPPs) to solve our power crisis, supply of coal to
them remains a major issue due to lack of coal sector reforms.

The natural gas based power plants feature no better. Domestic gas supplies are not
adequate and imported gas is too costly to produce power at a reasonable rate. The row
over pricing mechanism has also impacted the supply of domestic natural gas.

During the fiscal year 2014-15, the electricity generated in utility sector is 1,030.785 billion
KWh with a short fall of requirement by 38.138 billion KWh (-3.6%) against the 5.1% deficit
anticipated. The peak load met was 141,180 MW with a short fall of requirement by 7,006
MW (-4.7%) against the 2.0% deficit anticipated.

In a May 2015 report, India's Central Electricity Authority anticipated, for the 201516 fiscal
year, a base load energy deficit and peaking shortage to be 2.1% and 2.6% respectively.[27]
Southern and North Eastern regions are anticipated to face energy shortage up to 11.3%.
The marginal deficit figures clearly reflect that India would become electricity surplus during
the 12th five-year plan period

Transmission and Distribution loss:

With situation in the power generation segment improving the focus has shifted to other
areas with T&D losses topping the chart.
Page 30 of 51

The T&D losses in are well above 20% which is more than even our impoverished South
Asian neighbors. Globally most of the developed courtiers manage to keep the figure in
single digits.

Indias main problem is that here the power is transferred in bulk at high voltage of 132KV
and above through five regional transmission grids which has boosted the T&D losses.

Even though distribution companies, mostly state-owned, are saddled with about huge
debts, many parts of country has not seen tariff hikes enough for years to cover costs for
subsidies, corruption and inefficiency, nor has electricity theft been checked, forcing
electricity distributors into losses as high as 40 percent in some states, while the countrywide average is 27 percent.

Even in states where private players are engaged in distribution, Orissa for example, the
distribution network remains in shambles. The main concern of the private players is just to
keep the network going on instead of any long term investment to make them more resilient
to power fluctuations.

Though T&D losses in privately managed DISCOMs (like Delhi) have been reduced
officially - still many experts, including many CAG findings, believe that it has been made
possible by fudging the data and charging customers more than actual consumption.

Problems associated with Indias power mix

Coal: As has been mentioned quite often, thermal coal continues to play the leading role in
providing India with larger amounts of electricity. Even the new capacity additions are largely in
the coal based sector and the consumption of coal is rising too fast than available supply. At this
rate the annual imports of coal is set to rise from 150 million ton to 300 million tons by 2020. The
challenge in India today is keeping power plants supplied with coal.
Hydropower: India has a hydropower generating capacity of 41,267 MW, representing 16
percent of our installed capacity. According to a report by PWC, India is endowed with rich
hydropower potential to the tune of 148 GW (which would meet a demand of 84 GW at 60
percent load factor), potentially making it one of the most important sources to meet the energy
security needs of the country.
However, even if all of these projects are built and delivered within the timeframe (by the end of
2022) still we would have tapped only about one third of our potential. In comparison countries
like Canada and Brazil have achieved 69 and 48 percent, respectively. Chinas rise as a global
economic power has been closely linked with its ability to harness hydrological power in a very
cost effective manner.
On the other hand in our case the hydrological power has been seeing a negative growth since
1966 in terms of percentage of installed capacity. From 46% in 1960s it has come down to
about 15% now. Further various environmental concerns have stalled new hydro power plants
and India and because of that new capacity addition is not happening.

Page 31 of 51

While great hopes are being pinned on outsourcing of hydrological project to Bhutan and Nepal
their limited land mass makes them not significant as primary source of hydrological power for
India. For example currently supply from Bhutan constitute less than 1% of Indias entire power
generation and even if all the plants in Bhutan under construction start producing power it is
unlikely to cross 2.5%. Thus the situation needs to be addressed by indigenous measures only.
Nuclear: As of now we produce around 3.5% of our annual power output via this medium. In
the last one decade our capacity has grown threefold and is now close to 6000 MW. The
government is targeting 14,600 MW by 2024 and 27,500 by 2032 from this sector. Looking
further down the road, India aims to supply 25 percent of its electricity from nuclear power by
2050.
Though the additional power generation capacity in nuclear power is low, things may change
when the recently concluded India-Australia Civil Nuclear Agreement and soon to be inked
India-Japan Civil Nuclear Agreement is operational. A slew of Russian and French backed
power plants may spring to life in next 4 to 6 years giving India an additional installed capacity of
10000MW via nuclear power. Similar projects with US and Canada needs to take off if the
15000MW plan by 2024 is to be met.
Renewables: - Apart from nuclear energy the other sources of clean energy are also competing
for governments attention for reducing the power crunch. The NDA governments plan is to add
30,000 MW of new renewable sources out of which the share of wind energy is that of 15,000
MW, 10,000 MW of solar energy, 2,100 small-hydro power projects and balance to be derived
from biomass.
Thus it is quite clear that in the recent past, in our bid to augment the power supply, India has
overtly ignored the importance of evolving a sustainable power mix. As the description above
showcases the over reliability on power production via coal cannot go hand in hand with our
commitment to fight climate change. With coal based power plants facing global restrictions it
will become tougher if we do not shift more of our power production to non-conventional
sources.
NDA governments effort to boost the power sector
Following measures have been taken by the NDA government to boost the power sector during
last one and half years.

A 10-year tax breaks to power generation, transmission and distribution companies that
begin operation before March 31, 2017. Instead of annual extensions, the government has
extended it by 3 years, which will give predictability to the tax implications.

Reduction of excise duty on raw material used to manufacture solar and wind energy
equipment.

Introduction of concession based customs duty of 5 per cent to machinery and equipment
required for setting up of a project for solar energy production.

Inception of Green Energy Corridor (GEC) project to enable smooth grid integration of
renewable energy projects.
Page 32 of 51

Increase the clean energy cess from Rs. 50 per tonne to Rs. 200 per tonne, thereby
increasing the revenue of the National Clean Energy Fund by at least 400%. This will help in
generating fund that may be used to clear the subsidy dues and provide cheap loans to the
project developers.

Allocation of Rs. 500 crore for setting up ultra mega solar power projects in Rajasthan,
Gujarat, Tamil Nadu, and Ladakh in Jamu and Kashmir.

In the wind energy sector the much awaited accelerated depreciation (AD) scheme has
been re-installed. Right since the withdrawal of the AD scheme in April 2012, the industry
had been demanding for its re-instatement. Together with AD and other tax incentives, the
wind energy sector seems set to achieve the plan target of installing 15,000 MW in the
period 2012 to 2017.

In November 2014, the government approved three key projects in the power sector
targeting improvement of transmission and distribution (T&D). They include Rs 43,033 crore
rural electrification scheme, Deendayal Upadhyaya Gram Jyoti Yojana which would replace
the existing Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY).

Rs 5,200 crore scheme for strengthening power transmission and distribution network in six
North-east states and an additional Rs 32,612 crore scheme for strengthening subtransmission and distribution network in the urban areas.

During the Union Budget 2015-16 five new Ultra Mega Power Projects, each of 4000 MW
have been mentioned to be installed and will operate in Plug-and-Play mode. This will
increase the overall installed capacity of power generation in the country. Further, all the
clearances and linkages for five UMPPs will be in place before the project is awarded by a
transparent auction system.

The pre-clearance would play a critical role in ensuring timeliness of projects. Overall an
investment of $20bn will be required to convert these 5 UMPPs into reality, leaving huge
room for private sector participation.

The government also announced formation of Expert Committee for preparing draft
legislation on single window clearance. Time elapsed in acquiring different permits
clearances was always a major challenge in any energy & infrastructure project. With this
move, government has made its intent very clear that it will work towards improving the ease
of doing business in India and such legislation will have a significant positive bearing on the
investor and private sector outlook towards power sector projects and other infrastructure
sector likewise.

Electrification of the remaining 20,000 villages including off-grid Solar Power by 2020. Rural
electrification is critical in terms of socio-economic development of rural areas. This move is
expected to bring incremental infrastructure requirement for power transmission and power
distribution.

Page 33 of 51

Impact of these steps

Because of the rapid pace of governments initiatives in the power sector, Indias power
generation grew at an impressive pace during the financial year 2014-15. Power stations in
the country generated 793.7 billion units of power during this period, which was 9.9 per cent
higher compared to corresponding period a year ago. In 2014-15 as a whole, total power
generation in India is expected to grow by 8.5 per cent.

The growth in total power generation is expected to sustain in 2015-16. Expectations are
that total power generation will grow by 8.4 per cent in 2015-16 to 1,138 billion units. This
will be driven by strong growth in nuclear and thermal power generation. Nuclear power
generation is expected to jump by 19.3 per cent to 41.1 billion units.

Commercial operation of Nuclear Power Corporation of Indias Kudankulam atomic power

project will help the country in recording a double-digit growth in nuclear power generation.
The Kudankulam project consists of two units of 1,000 mw each. In December 2014, first
unit of this project began commercial operation. Apart from this, Bharatiya Nabhikiya Vidyut
Nigams Kalpakkam power project got completed by March 2015. It will have a capacity to
generate 500 mw of nuclear power.

Apart from strong growth in nuclear and thermal power generation, a recovery is also
expected to take place in the hydel power segment. In 2015-16, hydel power generation is
expected to grow by 6.4 per cent. However this will be subjected to the assumption that
rainfall to be normal and sufficient water will be made available to the hydel power plants for
power generation in 2015-16. Besides, hydel power generation capacity in India is expected
to increase by 3,085 mw in 2015-16. This will also help the country in raising its hydel power
output.

Electricity (Amendment) Bill, 2014

The government has also introduced a Bill in Parliament which seeks to enable consumers
to choose their electricity suppliers and penalise institutions violating the grid power supply.
The Electricity (Amendment) Bill, 2014, seeks to replace the Electricity Act 2003, which was
enacted to consolidate laws relating to generation, distribution, transmission, trading and
use of electricity. The amendments proposed in the Bill are based on the recommendations
of the 12th Plan Working Group of the Planning Commission.

Envisaging to allow the consumers to choose their electricity suppliers, the power ministry
has proposed to issue multiple supply licensees by segregating the carriage (distribution
sector) from content (power supply business) while continuing with the carriage as a
regulated activity.

Seeking to protect consumer interest, the Bill proposes to cap the tariff for retail sale of
electricity through the regulator and one of the supply licensees would be a government
controlled company.

Page 34 of 51

Need for structural changes in the distribution network

So now the challenges lie in structural changes in areas other than generation of power.
Despite several new power projects opening up or about to be opened there is no sign of
the government being able to put in place an assured payments system that enables
producers to get compensated for the power they sell to distributors. Nor are distribution
companies in a position to charge all their consumers reasonable tariffs for the power that is
supplied to them. This confluence of problems, if not tackled early, can blow up into a crisis
and dampen prospects of the solid and sustainable infrastructure growth that is a necessary
condition for an investment revival.

Recently a study also said that Indias average plant load factor (PLF) has dropped to a 15year low of 65.1%. This has created a paradoxical situation where state electricity boards
(SEBs) lack the means to buy power from power generation units, leading to surplus power
in the hands of power generators and a record low PLF. All this points towards very poor
condition of power distribution. In short, the inability of successive governments to
implement crucial pricing reforms has remained the perennial Achilles heel of the Indian
power sector.

For long, SEBs have been tasked with the role of procurement of power from power
generators, and its distribution to consumers. Being under the control of state governments,
they have served as tools of populism year after year. While free power to farmers has been
the one example often in the limelight, the beneficiaries of subsidized power are a far larger
group distributed across interest groups. Power theft is another major factor adding to the
huge losses incurred by SEBs.

The result has been balance sheets severely dented by debt as SEBs have borrowed
heavily to compensate for the lack of revenues from consumers. The total debt burden of
SEBs has continued to increase at a rapid pace over the years, with several studies pointing
out that the debt burden could even pose a systemic threat to the banking sector.

As of now the total exposure of state-owned banks to SEBs currently is 3.4% of their total
loans, or roughly Rs 1.6 lakh crore, of which around Rs 72,000 crore, or 46%, has been
restructured. In fact, banks overall exposure to the power sector (including the power
generation firms and PFC) is high, at close to 10%.

This has also led to demands that financially parlous condition of government-owned power
distribution companies must be improved. In the past it has always been done by giving
subsides or loan and/or interest waivers. They have clearly not worked out.

The Financial Restructuring Programme of SEBs that was initiated in late 2012 also did not
work. The terms and conditions were so loosely drafted that the SEBs got away lightly and
banks were left unprotected. So, while short-term loans were restructured and SEBs were
given moratoriums, there was nothing to ensure that tariffs must be raised periodically. A
tally taken by Indian Credit Rating Ageny in March 2015 showed that barely 15 out of 29
states had made the mandatory tariff filings whereas this process should have been
completed in November 2014 only.
Page 35 of 51

Certainly SEBs need to tighten up their purse as well as increase the tariff. But most states
have been averse to a big hike in tariff. When the annual losses of SEBs are close to Rs
75,000 crore, the tariff hike becomes inevitable, but its political repercussions have blocked
this path for long.

The other way out is to open power distribution to private capital and free market
competition. This can only happen through pricing reforms that allow distribution companies
the freedom to charge market prices.

Though privatization of power supply has worked in few states, many other states are yet to
have privatized power distribution companies and consumers must get open access or have
the freedom to choose from among competing power distributors. The distributors also need
to be given operational autonomy to fix power tariffs under regulatory supervision, so that
they can secure reasonable returns and do not turn financially sick.

Electricity regulators also need to be empowered and encouraged to play their mandated
role to monitor power tariffs and other supply-related issues, to ensure orderly growth of the
power sector and improved power availability for consumers.

UDAY (Ujwal DISCOM Assurance Yojana) for financial turnaround of Power Distribution
Companies

To solve the problem of the state electricity boards, the Union Cabinet recently approved a
new scheme moved by the Ministry of Power - Ujwal DISCOM Assurance Yojna or UDAY
which provides for the financial turnaround and revival of Power Distribution companies
(DISCOMs), and importantly also ensures a sustainable permanent solution to the problem.

The UDAY scheme aims to empower DISCOMs with the opportunity to break even in the
next 2-3 years. This is likely to be achieved through four initiatives (i) Improving operational
efficiencies of DISCOMs; (ii) Reduction of cost of power; (iii) Reduction in interest cost of
DISCOMs; (iv) Enforcing financial discipline on DISCOMs through alignment with State
finances.

Operational efficiency improvements like compulsory smart metering, upgradation of

transformers, meters etc., energy efficiency measures like efficient LED bulbs, agricultural
pumps, fans & air-conditioners etc. will reduce the average AT&C loss from around 22% to
15% and eliminate the gap between Average Revenue Realized (ARR) & Average Cost of
Supply (ACS) by 2018-19.

Reduction in cost of power would be achieved through measures such as increased supply
of cheaper domestic coal, coal linkage rationalization, liberal coal swaps from inefficient to
efficient plants, coal price rationalization based on GCV (Gross Calorific Value), supply of
washed and crushed coal, and faster completion of transmission lines. NTPC alone is
expected to save Rs. 0.35 / unit through higher supply of domestic coal and rationalization /
swapping of coal which will be passed on to DISCOMs / consumers.

Page 36 of 51

As per the UDAY scheme the Financial liabilities of DISCOMs are being transferred to the
respective state governments as it is their own lack of ability to manage power distribution
that has resulted in a woeful situations. So they need to share the burden now.

States have agreed to take over 75% of DISCOM debt as on 30 September 2015 over two
years - 50% of DISCOM debt shall be taken over in 2015-16 and 25% in 2016-17. This will
reduce the interest cost on the debt taken over by the States to around 8-9%, from as high
as 14-15%; thus improving overall efficiency.

Government of India will not include the debt taken over by the States as per the above
scheme in the calculation of fiscal deficit of respective States in the financial years 2015-16
and 2016-17.

States will issue non-SLR including SDL bonds in the market or directly to the respective
banks / Financial Institutions (FIs) holding the DISCOM debt to the appropriate extent.

DISCOM debt not taken over by the State shall be converted by the Banks / FIs into loans or
bonds with interest rate not more than the banks base rate plus 0.1%. Alternately, this debt
may be fully or partly issued by the DISCOM as State guaranteed DISCOM bonds at the
prevailing market rates which shall be equal to or less than bank base rate plus 0.1%.

Further provisions for spreading the financial burden on States over three years, will give
States flexibility in managing the interest payment on the debt taken over, within their
available fiscal space in the initial few years. A permanent resolution to the problem of
DISCOM losses is achieved by States taking over and funding at least 50% of the future
losses (if any) of DISCOMs in a graded manner.

Though adopting UDAY is optional for States, yet it provides the fastest, most efficient and
financially most feasible way for providing 24X7 Power for All. It will be operationalized
through a tri-partite agreement amongst the Ministry of Power, State Government and the
DISCOM.

UDAY is optional for all States. However, States are encouraged to take the benefit at the
earliest as benefits are dependent on the performance.

States accepting UDAY and performing as per operational milestones will be given
additional / priority funding through Deendayal Upadhyaya Gram Jyoti Yojana
(DDUGJY),Integrated Power Development Scheme (IPDS), Power Sector Development
Fund (PSDF) or other such schemes of Ministry of Power and Ministry of New and
Renewable Energy.

Such States shall also be supported with additional coal at notified prices and, in case of
availability through higher capacity utilization, low cost power from NTPC and other Central
Public Sector Undertakings (CPSUs).

States not meeting operational milestones will be liable to forfeit their claim on IPDS and
DDUGJY grants.

Page 37 of 51

The debate over Net Neutrality

The most important item of 21st Centurys economic development has been driven by webbased applications and usage of internet to speed up faster dissemination of information
and knowledge.

But it has also increased a digital divide between those who have access to the Net and
those who does not have such a privilege.

So while the Internet, thanks to the Net neutrality aspects, remains a free source of
information in terms of content, access to this content is available to only those who have
the capacity to pay.

As of now the net space has become a free market where you can peddle your products the
way you wish to, a free platform where you can express in any way you can, a free channel
where you can broadcast any material you wish too. In fact it is such a level playground
where all kind of Davids (small players) has a chance to take down a Goliath (big entities).

In the recent times there have been attempts to increase the accessibility of Net to more
users by changing a basic aspect of Net where a selective band of content is being made
available to users with no or nominal cost. However sites that can be accessed via this
mode need to pay up to widen their reach and enlarge their customer base.

This offer is like a sugarcoated pill that has the ability to destroy Internets nature of being a
level playing field. The new gamut of services under this format will make owning and
operating a site much more cumbersome than what it is as of now. It has the potential of
blocking access to sites that are not able to pay up and can work as de-facto regulation of
web content.

Still given the human nature for greed when an offer to regulation of content is sugarcoated
with free usage of net accessibility a lot of us are likely to fall for it. The recent debate over
Net Neutrality is all about this only.

On one hand telecom companies and some large web entrepreneurs are pushing for free or
subsidized plans that offer restricted usage of the net and on the other hand a vast majority
of net users want freedom of content and free access to all kind of material.

However before debating the issue any further it will be useful to analyze the real meaning
and importance of Net Neutrality.

Net Neutrality
Network neutrality is term for a solemn principle of the Webspace where all Internet traffic is
treated equally. A network must be designed in way that a public information network will end up
being most useful if all content, sites, and platforms are treated equally. Technically speaking
the Ney Neutrality means that operation of a service at a certain layer is not influenced by any
Page 38 of 51

data other than the data interpreted at that layer, and in accordance with the protocol
specification for that layer.

Advantages of Net Neutrality

The biggest advantage of Net Neutrality is that the ISPs have no control over the content.
As long as the content does not defy the law of the land they cannot discriminate between
Site A and Sit B. For example all e-commerce sites needs to be made available without
giving any preference to Site A which is free to use while Site B which is chargeable. It
gives the user a chance either to choose a product from Site A or from Site B. If the net
neutrality is not followed then more users will go to free sites and the business of the other
site will suffer.

A non-Net Neutrality based Internet refers to a situation, in which established persons,

corporations or governments favor certain uses. A closed Internet may have restricted
access to necessary web standards, artificially degrade some services, or explicitly filter out
content. Only those who have power financial, administrative or regulatory can afford to
host and display contents on closed internet networks.

Net neutrality protects people with innovative bend of mind and gives them an equal chance
against big companies. One of the reasons why e-commerce is so successful is that various
sites are not burdened by owning a lucrative place to do business. Startups like Flipkart and
Snapdeal could compete with established players like Futurebazzar and Myshop 18
because they had to focus only on providing cheaper goods and better service.

In future if the net neutrality is not followed then the new players will face difficulties as they
usually lack the capability to pay access charges.

It also has an impact on freedom of speech. Today blogs and private videos are becoming
great source of news, knowledge and entertainment. Most of this comes from individuals or
smaller groups. If Net neutrality is not followed this content will be overlooked in favor of free
conent from established media players and will wipe out the explosion of global sharing or
pooling of contents that we have witnessed in the recent years.

Net neutrality promotes competition. Here various companies/individuals/groups compete

with each other to provide best, cheapest and most useful content and products. In fact the
web space has as many producers as it has customers. Checks and balances on Net
Neutrality will reduce competition as ISPs will have the right to charge arbitrarily from
content producers, it will negatively impact the wellbeing of users too.

Some of the downsides of existing concept of Net neutrality

The concept of Net Neutrality was evolved when the number of content providers on www
was merely in thousands. The times have changed greatly from then onwards. Today
explosion of video based content has choked the lines with huge amounts of data. The
technological advances made in the recent times have come but they are no longer cheap.
Spectrum prices (once nominal) have now reached astronomical levels. Without enough
Page 39 of 51

money the operating model of net cannot be sustained. As it is almost impossible to charge
for contents in webspace (subscription based content has failed) the only reliable model of
revenue generation is carriage charges. If companies are willing to pay on behalf of their
users, nobody should object to it.

The web-based apps are eating into revenue models of Telecom operators. Already the
SMS biz has vanished due to free chat apps. As more and more apps are providing video
and voice chats the calling revenue is also likely to suffer in near future. Telecom companies
pay huge amount as license fee and spectrum charges that is not applicable to these apps.
So they gain an unfair advantage in the name of Net Neutrality.

The argument that Net neutrality protects innovation may also be flawed. If the telecom
companies can charge higher fees to the prime bandwidth hogs, they can also afford to
develop advanced fiber networks that support all forms of new Internet services.

Again not all users want all type of services neither all of them can afford high net charges.
The specific plans offered by Telecoms can widen the net base. Suppose an individual is
asked to pay only Rs. 10 for accessing his bank, getting surfing news and listening his
favorite type of music he is more likely to pay rather than opting a Rs.100 data pack that
offer free usage of net. As the wider net packs will always be available users can opt for
them if they want to see more contents.

Net Neutrality and India

When the issue started to heat up in the latter half of 2014, In India the principal of Net
Neutrality had no legal backing. Neither any kind of regulatory framework was present. Thus
the telecom companies started to offer plans and imposed restrictions on data usage. The
most prominent among them was Airtel. It was the pioneer of the practice that allowed
preferential access by offering special internet packs which allowed WhatsApp and
Facebook data at rates which were lower than its standard data rates. Later on more
companies followed this model.

Although the TRAI guidelines for the Unified Access Service license promotes net neutrality,
it does not enforce it. The Information Technology Act, 2000 also does not prohibit
companies from throttling their service in accordance with their business interests.

In December 2014 Airtel again changed its service terms for 2G and 3G data packs so that
VoIP data was excluded from the set amount of free data. A standard data charge of 0.04
per 10 KB for 3G service and 0.10 per 10 KB (more than 10,000.00 for 1GB) for 2G service
was levied on VoIP data. However stiff opposition made it roll back the restrictions.

Later on the company also launched a plan called Airtel Zero the scheme. Here app firms
will sign a contract and Airtel will provide the usage of these apps for free to its customers.

Another attempt at violating Net Neutrality was made in February 2015 when Facebook
launched Internet.org in association with Reliance Communications. It aims to provide free

Page 40 of 51

access to 38 websites through an app. Only Bing was made available as the search engine
overlooking the most popular search engines like Google, Yahoo and Wikipedia.

Net Neutrality vs. Network access

Many people argue that in the Indian context network access is more important than Net
Neutrality. Our country has a low internet penetration and less than 3% of Indians rely on
fixed lines for telephony or internet access. Wireless technologies offer lower bandwidth
than fiber or cable based services. The problem with the Internet in India today - the one
that exists now where most bits are charged the same - is that it's far too expensive for most
of the common folks. According to TRAI, only 20% of India is online - and that includes all
those people who turned on 2G once on their phone.

The problem for US internet (from where this debate about Net neutrality has arrived) and
broadband markets is abuse of monopolies. For India, it is scarcity. The vast majority of US
users depend on a single player for broadband access. The market is split broadly between
cable or fiber monopolies. In contrast, in India, Airtel the biggest player has roughly 25% of
the market, while at least four others have around 15%. An internet user in India frequently
has as many as ten providers to choose from. Apart from these there are government
owned firms BSNL and MTNL that can undo any attempt of cartelization in the telecom
sector.

Again the fear that ISPs will block access to sites outside the select group is also baseless.
The cutthroat competition in the telecom market is sure to keep the rates of general data
plans accessible.

There is also TRAI which has the rights to monitor the data plans and will not allow an
exorbitant price hike. If despite this certain customers opt for specific packs it is their
personal choice and their liberty to save money by using subsidized plans cannot be
questioned.

It is true that affordability of hosting content on net and showcasing them freely is a major
advantage of Net. But how long this free-for-all business model can be sustained. Already
there are allegations that search engines are tampered with paid links appearing on top and
SEOs are promoting useless content on payment basis. People often tend to select content
from first few pages of search. The tampering of search is thus already violating Net
Neutrality by altering the search preferences. Until and unless we know exactly the right
place to look for content we are more likely to be waylaid under the faade of Net Neutrality.

No Free Lunches for all

Net Neutrality seems to be an emotive issue more than a practical one. No other industry
with commercial repercussions follows it. Take the example of TV industry. Here too the
content is free and is supported by advertising. But here too the DTH operators charge
carriage fees and only those channels are aired that pay these fees. Viewers also have
Page 41 of 51

choice to choose between Free to Air channels as part of a basic pack and are asked to pay
for premium content. One can definitely argue that a broadcaster choosing a TV channel
goes against the concept of "TV-neutrality" but that is the way the industry has decided. So
why a preferential treatment should be given to Net content providers.

Furthermore very soon various governments are planning to enable free Wi-Fi access. If this
happens the telecom operators will lose more market share. Their revenue will nosedive if
app based VoIP services are not charged. In fact the government itself may be tempted to
ban VoIP from free Wi-Fi service as it may choke the network denying access to essential
services. At present, consumers get to make phone calls and send messages using
Internet connection through mobile applications and their computers. They are required to
pay only Internet bandwidth consumed but nothing on per call or message basis.

DoT panel report on Net Neutrality

After facing many tough questions on the issue of Net neutrality, the Department of
Telecommunication constituted a panel led by A K Bhargava which made its report public in
June 2015. The report is a mixture on the telecom users right of net neutrality and telecom
operators concerns of Net Neutrality. The main recommendations of the report can be
highlighted as follows:

The panel has said that the principal of Net Neutrality are vital for internet and its growth and
must be adhered to. The committee has requested all stakeholders to learn international
best practices, in addition to the core principles of Net Neutrality that will help in formulating
an India-specific Net Neutrality approach.

The panel has also said that Net Neutrality should be directed towards achievement of
developmental aims of the country by facilitating Affordable Broadband, Quality
Broadband and Universal Broadband for its citizens. In other terms it has warned against
price rise in tariffs for Net Neutral data plans.

The report has specifically highlighted that TSPs/ISPs should not restrict the ability of the
user to send, receive, display, use, post any legal content, application or service on the
Internet, or restrict any kind of lawful Internet activity or use to ensure the users right on the
Internet is upheld.

The issue of OTTs application the panel is of the view that they should be actively
encouraged and any impediments in expansion and growth of OTT application services
should be removed. There should be a separation of application layer from network layer
as application services are delivered over a licensed network. Specific OTT communication
services dealing with messaging should not be interfered with through regulatory
instruments.

In case of VoIP OTT communication services, there exists a regulatory arbitrage wherein
such services bypass existing licensing and regulatory regime to create a non-level playing
field between TSPs and OTT providers. Public policy response requires that regulatory
Page 42 of 51

arbitrage does not dictate winners and losers in a competitive market for service provision.
The report has placed emphasis on protecting domestic communication services by telecom
service providers. However, in case of OTT VoIP international calling services, a liberal
approach may be adopted.

The panel did not support any kind of regulatory oversight similar to conventional
communication services for the OTT services.

The panel has said that legitimate ways of traffic management on net should be allowed, but
Net Neutrality important. It has supported the view that the traffic management is quite
complex and specialized field and enough capacity building is needed before undertaking
such an exercise. Still in the name of covering the expenses traffic management practices
that are exploitative or anti-competitive should not be allowed. Essentially, if a TSP starts,
say, a video-streaming or music service, it cannot slow down the speed of a competing
service of a similar nature on its networks.

This Committee however refrained from making any specific recommendation on searchneutrality, despite flagging this issue as a concern for public policy.

The panel has further said that all the Tariff plans offered by TSPs/ISPs must conform to the
principles of Net Neutrality set forth in guidelines issued by the Government as Licensor.
TRAI may examine the tariff filings made by TSPs/ISPs to determine whether the tariff plan
conforms to the principles of Net Neutrality. So a special tariff plan for WhatsApp or even
Wikipedia which offers the service for free, could be seen to be in violation of the principle of
Net Neutrality.

Content and application providers cannot be permitted to act as gatekeepers and use
network operations to extract value in violation of core principles of Net Neutrality, even if it
is for an ostensible public purpose.

It also notes that very often the content market sees the rise of a leader, and that if these
end up directing users to specific content, it amounts to a violation of Net Neutrality. Based
on what the committee has recommended, Internet.org or even Airtel Zero rating app will be
seen as violating the principle of Net Neutrality.

A clause, requiring licensee to adhere to the core principles of Net Neutrality, as specified by
guidelines issued by the licensor from time to time, should be incorporated in the license
conditions of TSP/ISPs. The guidelines can describe the principles and conditions of Net
Neutrality in detail and provide applicable criteria to test any violation of the principles of Net
Neutrality.

New legislation, whenever planned for replacing the existing legal framework, must
incorporate principles of Net Neutrality. Till such time as an appropriate legal framework is
enacted, interim provisions enforceable through licensing conditions as suggested by the
Committee may be the way forward.

Page 43 of 51

Net Neutrality and Digital India

Another big concern regarding Net Neutrality is that attempts to do away with may sabotage
the grand plans for Digital India. The government has been talking about using Internet to
unleash Indias entrepreneurial streak but this will become impossible if Net Neutrality is
violated.

The core of Digital India lies the development of the digital ecosystem in terms of apps and
app-based government services, as well as free and equal access to all these for
consumers across the country. Any move to throttle access or create hurdles towards
development of start-ups working on apps will hit at the essence of net neutrality.

By its very nature closed internet plans favour established players and facilitated the entry of
corporate sector. As most plans for Digital India include offering government service via
Web, a closed internet plan will either make the services unavailable for users or the
Government will have to sell out money to include them.

Though the Government can force the operators to conform to Digital India plans still such
directives may be non-immune to judicial scrutiny.

According to a telecom department reports the net neutrality is important considering poor
internet coverage in India. The report says that India has the third highest number of Internet
user in the world but has the lowest Internet penetration. India belongs to the list of 42 least
connected countries in the world. It goes on to say that one of the key drivers of the growth
of startups is the openness of the Internet.

Page 44 of 51

Coal Block Auction and the road to reforms

Backgrounder on Coal mining in India

Despite having worlds largest extractable coal reserves - 240bn metric tonnes as per 2010
estimates and a long history of commercial coal mining dating back to 1774. India has
been a net importer of coal to meet the growing demands for coal as it now accounts for
almost 75% of Indias power production.

A major blame of this crisis is linked to monopoly of the state PSU Coal India Limited (CIL)
in coal production. Ironically for more than two centuries - till 1971- coal mining in India was
a private sector activity.

The nationalization was done due to fears that the private coal miners were looting the
mines with almost negligent respect for preservation of ecosystem of welfare of employees
and people living in the mining areas.

The move also served well as coal production was able to support an economy that was
growing at a rate of 4 to 5% in 70s and 80s and manufacturing was not among the main
engines of growth.

But the freeing up of Indian industries in 90s sparked large scale increase in demands of
coking coal. Clearly the overburdened CIL was in no position to rise up to demand and it led
to huge imports of coal. The twin fact of unutilized coal reserves and rising import Bills
prompted the government to seek the alternatives.

Since privatization of coal was not a option as trade unions and political opinion in coal
producing states was against the idea a middle path of Captive Mining was discovered.
The term means that certain industries apply to the government for allotment of coal mines
for their own use. They were not allowed to sale the produce and hence did not violate CILs
monopoly.

Adoption of the Captive mining route and its manipulation

To facilitate allocations of captive mines a screening committee under the chairmanship of

the coal secretary was set up in July 1992. A total of 143 coal blocks of Coal India and
Singareni Collieries, for which production plans werent in place, were offered. The Act was
amended in June 1993 to include power as end use. In March 1996, cement and in July
2007, coal gasification and liquefaction too were notified as specified end uses. Captive
mining was opened up to 100 per cent FDI under the automatic route in Feb 2006.

Though the allocation of Captive Mining continued till 2008, it run in to rough weather when
the Comptroller and Auditor General (CAG) pointed out that by doing this the country is
losing vast amount of money.

It estimated that 67 coal blocks allocated between 2004 and 2009 had resulted in a loss of
Rs. 1.86 lakh crores to the exchequer. The audit noted that while an inter-ministerial
Page 45 of 51

screening committee decided on the allocation of coal blocks to end-users in the private
sector, the minutes of the steering committee did not indicate how each one of the
applicants for a particular coal block was evaluated, rendering the process non-transparent.

This mattered because the cost of production of coal from the captive mines was much less
than the price of equivalent grade coal supplied by Coal India Limited (CIL). Since the prices
of end-products are administratively or otherwise linked to the official price of coal as
charged by CIL, producers of such products with access to captive coal blocks stood to
make windfall gains. This not only deprived the government of revenues, but also amounted
to a profit transfer to an arbitrarily chosen set of producers.

The report created a big furor and also resulted in a legal challance and finally the Supreme
Court cancelled the allocation of more than 200 coal mines allocated by the government
between 1993 and 2010.

SC order on de-allocation of captive Coal mines

In September 2014, the Supreme Court ordered to de-allocate captive mines given to
private companies through two decades. Citing the (governments) approach in allocation of
these mines as ad-hoc and casual, the order sought another fair and transparent allocation
with auctions as the most appropriate manner for ensuring this.

The main catalyst behind such a scathing reaction by the Apex court was that there weren't
any set criteria for allocation of mines. Since mining deals with natural resources held by the
government in public trust, discretion in allocation to private companies is usually viewed
with suspicion.

State government companies that were given mining rights under the government's
dispensation route also faced de-allocation, as they gave mines to private companies for
commercial mining, not allowed under the law earlier.

The court order only exempted four blocks. These include two ultra mega power projects -Moher and Moher Amroli Extension -- allocated to Sasan Power Ltd, Tasra allotted to Steel
Authority of India Ltd. and Pakri Barwadih coal block of the National Thermal Power
Corporation.

Though the Government wanted 46 blocks exempted, the court said the remaining 42 could
continue production for the next six months, provided they pay Rs. 295 per tonne levy.

It is to be noted that SC only rejected the process of allocation of these mines and did not
disapprove the basic concept of captive mining.

2015 rounds of auctions

Following this verdict the NDA government adopted a new methodology for auction of these
blocks and conducted a fresh round of auction in February 2015 and April 2015. The total
gains from these auctions were to the tune of Rs. 2 lakh crores.
Page 46 of 51

The methodology for ensuring fairness and transparency during this round of auctions included:

A transparent e-auction by competitive bidding of the coal blocks.

Auctioning the fully explored coal blocks first and to be followed partially explored and
unexplored ones.

Fast tracking the auction by exploration of regionally explored blocks through up gradation
of geological data to a reasonable level of certainty.

It also provided for production linked payment on rupee per tonne basis, plus a basic upfront
payment of 10% of the intrinsic value of the coal block. The intrinsic value of coal block is to
be calculated on the basis of Net Present Value (NPV) of the block arrived at through
Discounted Cash Flow (DCF) method.

To benchmark the selling price of coal, the international FoB price from the public indices
like Argus/Platts is used by adjusting it by 15% to provide for inland transport cost which
would give the mine mouth price.

The average sale price will be calculated by taking prices during the last 5 years. It takes
care of short-term volatility of prices that may impact the business plans of the buyers.

A 90% discount was given to the power sector firms on the intrinsic value for tariff based
bidding. This methodology is expected to help in rationalizing the power tariff.

New and unique features

A very unique feature of the auction process was the different methods adopted for bidders
from the power sector, where the prices are regulated through power purchase agreements
or price fixing authorities, and other user industries. In the case of captive blocks for the
power sector, the method adopted was a reverse auction with the price charged by CIL for
equivalent grade coal serving as the ceiling price.

Reverse auction scheme

Under the reverse auction scheme, the bidder for the block quotes a price equal to or below
the CIL benchmark, which would be taken into consideration when pricing electricity
produced with coal extracted from the block. Besides this, the bidder must offer to pay the
State government concerned a quoted price per tonne for the coal extracted. The reserve or
minimum price to be paid to the State government was set at Rs.100 per tonne.

In order to ensure firm commitment, it has been provided for an agreement between the
Coal Ministry and the bidder to perform agreed minimum work programmes at all stages.
There would be development stage obligations in terms of milestones to be achieved such
as getting mining lease, obtaining environment/forest clearances etc. The bidder was asked
to give performance guarantee during the developmental stage. The successful bidder will

Page 47 of 51

get 2 years for exploration (for regionally upgraded blocks) and 5 years for development of
coal blocks.

The new policy also provides for relinquishment of the block without penalty, provided, the
bidder has carried out minimum work programme stipulated in the agreement.

All these points were backed by a firm commitment by the government that it will take all
necessary measures to make the mines operational as soon as possible. This resulted in a
trust among the bidder and they opened up the purse string in an unexpected manner.

The success of this policy can be gauged from the fact that within three months of auction
seven out of 67 coal mines auctioned and alloted begun operations. By the end of May 2015 out
of a total of 67 coal mines successfully auctioned and alloted, vesting/allotment orders were
issued in respect of 45 coal mines. Out of these 45 coal mines, environment clearances were
transferred in favour of successful bidder/allottee for 37 coal mines.
The Centre has taken up the matter of expediting various clearances with the concerned coalbearing state governments and has been regularly pursuing with the authorities concerned for
bringing the auctioned/ alloted mines into production as soon as possible. These results augur
well for future rounds of auctions be it in coals or any other mineral reserves.

Major benefits from the auction policy

When the CAG reports first surfaced many did not believed the loss figure of Rs. 1.86 lakh
crores as a justifiable one. However the first big benefit of the auctions is that it not only
restored the faith in institutions like CAG, it also made people more aware about the vast
potential of our coal reserves. The positive outcome of these auctions is also expected to
impact the decision making process in the allocation of other minerals and making arbitrary
allocations in the name of keeping public interest in mind is all but over.

The second major benefit is that it has resulted in a major windfall for states producing coal.
As the central government has just acted as a facilitator for the auction, the entire amount of
Rs. 2 lakh cores is likely to be passed on to states like Odisha, Jharkhand, West Bengal and
Chattisgarh.

A study done by SBIs EcoWrap, as reported by DNA, said that total payment to the states
over the next 30 years would be Rs 4 lakh crore with an equal amount to flow in regularly
through royalty payment.

In addition consumers in States receiving power from plants attached to seven coal blocks
reserved for the power sector are projected to benefit to the extent of Rs.37,050 crore a year
because of lower tariffs, due to the outcome of reverse auction.

These auctions also debunked a theory that coal mining is a cumbersome and unattractive
business enterprise and no one will indulge in this process unless they get substantial
benefits compared to hassle free route of coal imports. The success of auction at a time

Page 48 of 51

when global coal prices are going down is ample proof of willingness of the private sector to
undertake coal mining on their own.

It also punctured the theory that the non-coal private sector companies do not have
technological know-how and required investments to extract the coal. So the only way to
reduce coal import and save foreign exchange outflow is to allocate them a mine at no-cost
to company basis. These auctions have now proved that coal extraction is an extremely
lucrative activity and companies are willing to pay for it.

Another major argument to give captive mines to power sector firms was that it will keep the
power tariff rate low. This myth has also been busted now. We now have a situation where
producers are willing to set fuel costs at zero to calculate power tariffs, as well as pay State
governments a price for the coal extracted that was much higher than the reserve price set
by the auctioneer. As a result, despite power producers paying huge sums to the
government, power tariffs are expected to come down rather than rise.

A whisper campaign growing in some quarters suggest that the aggressive bidding was due
to a case of excessive competition and a degree of irrational exuberance about freeing up of
coal sector. It was also driven by the fear of firms to secure supplies of the raw material,
even if that resulted in much lower profits. The basis of both these presumptions however
appears to be weak. The private sector is known to spend its money wisely. It will not waste
a penny without some considerable research. So overbidding by not one but hundreds of
companies is not acceptable. Second there is no crisis of coal globally and supply of
imported coal has never been a problem. So there appears no reason for them to act is
haste.

Importance of further reforms in the coal sector

Despite the auctions being financially successful, these blocks are still captive mines and
will be not beneficial for economy at large. Many of us may sneer at term block gold
which incidentally found mention in the SC verdict- for coal yet there is no doubt that it still
remains most critical domestic energy resource in our country where almost 80% of energy
is generated by the thermal coal based power plants. The SC even went ahead to proclaim
Coal is the king and paramount lord of industry.

Sadly despite the importance of coal for over industrial development its mining is still
troublesome. Despite a production in above of 500 million tonnes, the coal imports have
been constantly rising and we are now world's 3rd largest coal importer. The coal import bill
was $16 billion in 2014-15.

Power is a big ingredient in any kind of manufacturing growth and lack of easy coal
availability had become one of the bottlenecks in speeding up growth. In fact in the second
quarter of 2014-15 inventories available with the power plants had plunged to just two or
three days of stocks. This has now been raised to at least 20 days stocks, or even higher in
most plants.

As Make in India gather steams and growth rate scales back to 7-8% bracket the need for
coal to fuel more thermal power generation will spurt too. The CIL wants to double its
Page 49 of 51

production in 2019-20 to one billion tonnes with another 500 million tonnes slated to come
from the mines given to private companies through the auction route.

Yet, given the history of CIL and other process attached with PSU operations even a 700MT
target by 2020 looks ambitious. So even in the most optimistic scenario, coal imports will be
required in increasing amounts for the next four years to meet the demand. So much more
needs to be done if we need to cut down on imports and save precious foreign reserves.

Limitations of Captive Mining

A major limitation of captive mining route is that the companies to whom the blocks are
allotted do not have experience in mining of coal. In the developed nations, it is gathered
that the natural resources (like coal, minerals, oil, gas etc) are assigned only to those who
are capable of mining them. In our own country too, the oil/ gas blocks are given out by bid
route only to those who score highest points on technical criteria (out of the assigned 70
points of the total 100), together with the points scored on financial criteria (out of the
remaining 30 points) in terms of Production Linked Payment (PLP) etc. On similar lines, the
company applying for a coal block, to a large extent, must have the core competence in coal
mining or legally associate a coal mining company having the set out experience and
expertise in mining operations, to become technically eligible and capable of mining and
also give out maximum revenue to the Government.

A more illustrative factoid related to limitations of captive mining of coal is that in spite of
private investment being allowed in captive mining (foreign direct investment of up to 100
per cent is allowed), there has hardly been any big-ticket investment. Global players like
BHP Billiton and Rio Tinto have not shown any keenness for captive mining.

Now the companies have invested too much money in obtaining the mines. Naturally they
will intend to extract as much coal as possible. This may open third party contracts where
experienced freelance mining firms handle the mine on behalf of these companies. It may
solve part of the problem still the size of captive mines allocated to these firms are too small
and too haphazard to implement newest available technology in the coal mining sector. So
the potential of a huge growth in coal production via captive mining is not too much.

How introduction of more private players will help?

All this leads to a more drastic option of opening coal mining to private operators for
commercial purpose. Experts say that breaking monopoly of CIL on coal mining and
opening up the sector for competition may be the only long term way-out of the present
mess in Indian coal sector. Once the coal sector is fully opened, both for exploration and
exploitation, the rules for selecting companies for assigning coal bearing areas for
exploration and for allotting the large blocks for exploitation can be framed by keeping the
technical as well as the financial criteria requirement in the lines mentioned above. Large
coal blocks should be auctioned globally among the world class coal mining companies,
both Indian as well as from overseas. By this process, the competitive bidding would be
limited to few large blocks, making the whole process easier to manage.

Page 50 of 51

It also needs to be understood that true value creation in the mining sector requires raising
the level of extractable reserves, actually exploiting such extractable reserves, raising the
amount of mineral extracted from a given reserve, improving the quality of the resource
extracted, raising productivity, reducing costs of mining and the subsequent handling and
transportation of the extracted mineral and, above all, deploying best practices and cutting
edge technologies that enable all of the foregoing sustainably. All of this can only happen if
we allow commercial exploration and mining of Indian coal by leading global players and
institute an independent regulatory regime that fosters genuine competition in the coal
sector.

Roadblocks to privatization
However all this is easier said than done. There are several points that blocks large scale
privatization of the coal mining sector.

First of all it requires an amended Coal Mining Bill and given NDA governments lack of
majority in the Upper house it is unlikely to get through without significant opposition.

A big notion although wrong - in the minds of the trade unions operating in the coalfields is
the privatization of coal mining means privatization of CIL and hence loss of job. The reality
is that entry of private players will be alongside CIL in its present structure just as BSNL
continues to operate alongside AirTel and Reliance.

More competition in coal mining will mean more jobs and better facilities are skilled workers
will have opportunity to shift jobs. Coal Indias unions need to be reassured by the
government that there is space for both Coal India and the private sector as GDP
grows and along with it, power demand.

Another red flag raised to protest privatization of coal mining is that the entry of private
miners may not lead to any substantial technological advancement. It is argued that
nationalization of coal mining was done only because the the shady record of the private
sector in this field. Hardly any miner had invested in modern mining technologies. Their
methods were primitive and unscientific. Accidents and fatalities were common. Workers
were treated shabbily. However the times have changed a lot since 70s. At that time MNCs
were wary of investing in India and small companies with opaque financial standings ruled
the roost. As it now appears coal mining is a Billion Dollar game and any chance of clock
getting reset to pre 70s era is nonexistent.

Another counterpoint is that opening up the coal mining to the private sector does not
guarantee reduction in coal prices and dependence on imports. China for example opened
its coal mining to private sector in 1978 and has gained by emerging as the world's largest
producer of coal at about 3,500 MT per annum. Still it is a big importer of coal and prices
have gone up for domestic Chinese coal. It may be a true stats but it clouds more than what
it reveals. China has constantly grew at the rate to 8-12% in 80s, 90s and 2000s, had it not
privatized coal mining its phenomenal growth was not possible. Chinas problem is that its
rate of growth outpaces the coal production increase. If India has any lesson to learn that it
to speed up coal production before demands move to unmanageable proportions.
Page 51 of 51