Friday, October 5, 2012

Super Thursday Reforms Burst

Manmohan Shining

The Congress-led Government unleashed a Super Thursday  reforms burst – ranging from raising the cap on foreign investment in insurance, allowing foreigners to invest in pension funds, allowing options in commodities markets to clearing a Competition law, a new Companies law which would see more independent directors on corporate boards and clearance to the country’s 12th five year plan.
The rash of cabinet clearances comes on the back of a pull-out by former ally Trinamool Congress which had among other things opposed plans to raise foreign investment in insurance firms to 49 per cent and to allow foreign-held equity in pension funds besides introduction of options in commodity trading. The break had come when the Manmohan Singh
However, passing the twin financial sector bills- Insurance Amendment bill and Pension Regulator’s bill – will be a tough job given the fact that the UPA government does not enjoy a majority in the upper house.
“We will now discuss the passing of the bills with principal opposition parties,”  finance minister P.Chidambaram said cryptically after the reform moves were cleared by the union cabinet today.
The principal opposition party BJP had agreed to help pass the insurance bill, provided the foreign investment cap was retained at the current level of 26 per cent.
With this agreement junked tonight,  BJP made it clear that it would oppose the bill. The UPA holds 95 seats in the upper house which has a strength of 245. If it can ensure the votes of BSP, SP and the RJD together have 27 members, then it can sail through with the bill.
Otherwise, the only way the government can get over this hump is to declare the bill, a money bill which would necessitate passage by just the Lok Sabha. Money bills, which vote in new taxes or cesses or allocate expenses from the Consolidated Fund of India, cannot be held back by the upper house under the Indian constitution.
Officials said as the bill stands today, the Insurance Amendment bill cannot be defined as a money bill, which would mean it would have to be passed by both houses of Parliament. However, the original IRDA Act which the new bill seeks to amend was a money bill as it voted for a cess to be imposed on insurance firms. Law ministry officials said if the new amendment bill is technically declared a money bill because of the cess element, then the Government could hope to by-pass Rajya Sabha, where the UPA is in a minority.
Finance ministry officials clarified that the cap on foreign investment will be raised to 49 per cent, including both foreign direct investors as well as foreign institutional investors.  Officials also said that the foreign investment cap will not apply to PSU insurers where foreign direct investment was not yet allowed.
The pension bill will have a clause which will state that the foreign investment cap in that sector will follow rules in the insurance sector. Which means if the insurance bill is passed by Parliament, then the foreign investment cap in the pension sector would also be 49 per cent, otherwise it would be set at 26 per cent.
“I hope the management of consensus in Parliament is successful … the government is doing its Dharma, now it’s up to Parliament,” said plan panel deputy chairman Montek Singh Ahluwalia.
The IRDA Amendment Act already stands introduced in Parliament and a standing committee has given a report on it which recommended that the FDI cap should not be raised but agreed to go along with other changes. The government was supposed to study the recommendations and re-introduce the bill with changes it thought were needed, but had dithered till now for want of a consensus.
The re-introduction will not necessitate the bill being sent to a standing committee. However, the Lok Sabha could, if it so chooses send it back to the committee for a fresh study. Officials said this was likely to be a last ditch strategy, if the government was unable to muster the majority needed to clear the bill.
The other changes which will be brought to the IRDA ACT, call for allowing Lloyd’s of London to open an insurance trading floor in Mumbai, somewhat akin to a stock market, and to permit foreign reinsurance firms such as Swiss Re and Munich Re to enter India besides giving a green signal to public non-life insurance companies to raise capital by selling minority stakes. Changes which are not being contested by any party except the Left parties.
The pension bill too faces the same situation. The BJP opposed raising the foreign investment cap beyond 26 per cent, but it was the Left and Trinamool which objected to the very bill itself with its ingrained logic of allowing private funds to manage pensions.
Similarly, it was the Trinamool which nixed another step taken by the cabinet today – introduce options trading in the commodity market. A step which is in line with the thinking of the Left front against which it is pitted in West Bengal.
Options trading allows a trader to buy or sell a commodity at a future date at a price which he expects will rule around that time.
In July, Trinamool Congress Supremo Mamata Bannerjee had forced the Prime Minister to defer the move citing fears that it could raise farm produce prices.
Options trading and even trading in commodity exchanges have  in the past been blamed for speculative price spirals but the cause and effect was never clearly established. However, it has always been a popular villain, in Left narrative, something which the Trinamool Congress follows keenly, despite political differences.