360 Degree View- Watch around

360 Degree View April 2024

1. Internationalising the Indian Rupee (INR)

A currency can be termed “international” if it is widely accepted worldwide as a medium of exchange. The internationalization of the Indian Rupee (INR) gathered steam following the Reserve Bank’s announcement of a mechanism to settle payments for international trade in Rupees, especially for India’s exports. RBI allowed invoicing and payments for international trade in Indian Rupee on July 11, 2022.  

During the last two decades, India has emerged as one of the world’s fastest-growing economies and also a preferred destination for global investors. The Indian economy has also shown remarkable resilience against adverse global developments, especially during the COVID-19 pandemic.

Given the potential benefits of the internationalisation of INR in terms of lower transaction costs for cross-border trade and investment operations and lower exchange rate risk, various measures have been taken toward this end over the years, including the calibrated easing of regulations to promote greater convertibility on the capital account. Furthering internationalization and capital account convertibility (CAC) would, however, require the complementary efforts of multiple stakeholders, including regulators, policymakers, and industries.

There is some anecdotal evidence that INR is accepted to some extent in Singapore, Malaysia, Indonesia, Hong Kong, Sri Lanka, United Arab Emirates (UAE), Kuwait, Oman, Qatar, and the United Kingdom (UK), among others, while it is legal tender in Nepal and Bhutan

Various measures have been undertaken in recent times to promote the internationalisation of INR. These, inter alia, include:

  1. allowing issuance of offshore Rupee-denominated ‘masala’ bonds;
  2. allowing domestic banks to freely offer foreign exchange prices to non-residents at all times,  out of their Indian books, either by a domestic sales team or through their overseas branches;
  3. allowing Rupee derivatives (with settlement in foreign currency) to be traded in International Financial Services Centres (IFSCs); and
  4. an additional arrangement for invoicing, payment, and settlement of export/import in INR has been enabled vide circular dated July 11, 2022.

RBI Committee Report of the Inter-Departmental Group (IDG) on the Internationalisation of the Indian Rupee was published in October 2022. ( Reserve Bank of India – Reports (rbi.org.in). This IDG has deliberated on all the above key issues and suggested suitable reform measures and recommendations in this regard.

The newly launched digital rupee will also provide the needed technological edge for spreading the currency globally. However, there are a few concerns like:

  1. International Banks have a big role in taking INR global as they can help by providing distribution networks, clearing and settlement services, liquidity, and leverage. however, the Reduced presence of International Banks in the Indian Market is a point of concern for us in this road map for Internationalizing INR
  2. The stringent taxation system of India is a hurdle and there is a need for having a less stringent framing and enforcement of the Tax Policies.
  3. India’s Judicial system needs to be more efficient and it shall enable us to resolve the grievance at a faster pace like the case of Future-Amazon and SpiceJet, etc.

2. India moving from Cost Saving Unit to Global Capability Centres (GCC) to a Transformational Unit

Initially for many MNCs Indian units were Cost Saving Units which are now considered Global Capability Centres (GCC) and for some, it is Transformational Centres (TC) with intellectual capital Units with the advantage of cost and quality.

India commands over 50% of the Global market of GCC with an estimated 500 plus Global Leadership Roles situated in Indian GCC. More than 80% of GCC in India are directing their focus towards digital capabilities like Generative Artificial Intelligence (AI), Machine Learning (ML), Data Analytics, Cybersecurity, Cloud Computing, and Robotics Process Automation.

This sector is witnessing significant diversification in demand and capability functions. For instance, healthcare (21%), hi-tech (21%), BFSI (14%), manufacturing (14%), and retail (7%) are key drivers of demand.

Indian GCC is expected to host over 60 Chief Information Officers and Senior Vice Presidents by the end of 2024. The GCC sector, valued at $46 billion presently, is forecasted to reach $110 billion by 2030.

India stands out with its unique blend of tech talent, a thriving startup ecosystem, and consistent government support, making it the top choice for setting up Global Capability Centers (GCCs). This growth is projected to create employment opportunities for over 4.5 million professionals across 2400 Global Capability Centers (GCCs). Bengaluru and Hyderabad have solidified their positions as major GCC hubs, boasting over 30% and 19% GCC presence, respectively.

Gujarat International Finance Tech-City (GIFT City) is gaining traction as an appealing destination due to its regulatory environment within the Special Economic Zone (SEZ). It offers the advantages of competitive taxes, streamlined business processes, lower operational costs, and top-notch infrastructure.

BDO India LLP, one of the large advisory firms plans to launch a GCC by teaming up with BDO member firms from India, US, UK, and Germany. The GCC will be established in Noida, aiming to hire around 5000 people over the next 3-4 years. This move reflects the growing trend of professional services firms setting up and expanding their capability centers in India.

BDO EDGE will offer assurance, accounting, outsourcing, advisory, and technology services to BDO firms. Its launch will foster collaboration and enhance capabilities among the firms, leading to innovative offerings.  There will be three independent BDO organizations in India which will provide the following assistance: –

  • BDO EDGE: Collaborative Center of Excellence
  • BDO India LLP: Accounting, Tax, Advisory, Business Services, Technology and Digital services
  • BDO RISE: Exclusively cratering to BDO USA’s engagement teams.

3. GCCs, Co-working, and IT to drive office demand

The study of Knight & Frank reads that in 2023, GCCs accounted for 30% of office space leasing volume in Bengaluru compared to 25% in 2022. According to an EY report, India is currently home to around 1550 GCCs, and this number is projected to rise to approximately 2300 by 2030. This expansion will potentially lead to a growth in employee headcount to 4.5 mn in 2030, compared to the current 1.9 mn.

Thus, the prospective growth in the GCC occupier’s leasing space is massive in India. Within India, Bengaluru is an attractive market for GCC occupiers as the city is already an established global hub, has a diverse talent pool, and a unique ecosystem comprising technology penetration, research & development, startups, academia, and more.

The growing demand from GCCs, the rise of flexible and co-working spaces, and the expansion of the IT sector are set to drive the uptake of 1.7 billion square feet of office space.

Over the past few years, government initiatives such as the establishment of Special Economic Zone (“SEZs”), Software Technology Parks (“STP”), and Export Oriented Units(“EOUs”) have significantly supported India’s Commercial Real Estate (“CRE”). In 2003 the top eight cities in India recorded office transaction volumes of 60 million square feet, in 2008 the same was 278 million square feet which has now increased to over 900 million square feet.

4. Funding in Start-ups

Indian pension funds and Insurers are not allowed to directly back startups but can invest 3-5% of their investable surplus into Alternative Investment Funds (AIFs) or Fund of Funds that support local startups. Having a safety net in place may allow for easing regulations to increase this limit and permit direct investment by these institutions, which managed close to Rs 100 lakh crore of public money at the end of fiscal 2023, into a sector where new funding has dried up in recent years. The government is preparing a framework to help minimize the risk for local pension funds and insurance companies from investment in the startup sector, which has become a major employment generator and contributor to the economy but where business failures are fairly common, officials aware of the matter said.

Read more at: https://economictimes.indiatimes.com/tech/startups/safety-net-in-works-to-widen-local-funding-pool-forstartups/articleshow/109322234.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst 

5. Relaxed FDI Cap for Space Sector / Industry

The Finance Ministry had announced enhanced Foreign Direct Investment (FDI) limits for Satellite-related activities under the Foreign Exchange Management (Non-Debt Instruments) Rules.  These new rules based on a Cabinet decision (effective from April 16) as per a Gazette Notification, align with the Cabinet’s decision in February to relax FDI caps. These new rules aimed at attracting more foreign investors to the Indian space sector.

Under the updated guidelines, up to 100% FDI is permitted in the space sector. However, up to 74% FDI is permitted under the automatic route in satellite manufacturing and operation, satellite data products, and ground and user segments, and beyond 74%, FDI in these activities requires Government Approval.

In accordance with the latest notification, up to 49% FDI is permitted under the automatic route for launch vehicles and associated systems or subsystems, as well as for the creation of spaceports for launching and receiving spacecraft. Government approval is required for investments beyond this threshold.

Additionally, the Government has authorized up to 100% FDI under the automatic route for the manufacturing of components and systems or subsystems for satellites, as well as for the ground and user segments.

The notification stipulates that the investee entity must adhere to sectoral guidelines issued by the Department of Space. It also provides clear definitions for various satellite-related terms and activities, including manufacturing and operation, satellite data products, ground and user segments, and spacecraft, to eliminate any ambiguity regarding the FDI policy.

Satellite manufacturing and operation encompass the end-to-end manufacturing and supply of satellites or payloads, including the establishment of satellite systems and control of in-orbit operations. Satellite data products involve the reception, generation, or dissemination of earth observation or remote sensing satellite data and associated products, including application interfaces.

6. ESG Rating

The surge in applications from renowned entities like Morgan Stanley Dean Witter (MSCI) and the London Stock Exchange to become ESG rating providers in India reflects a paradigm shift in corporate accountability and investor expectations. This wave of interest comes against the backdrop of regulatory advancements that are reshaping the landscape of ESG reporting in the country.

In India since the fiscal year 2020, the top 1000 companies by market capitalization have been mandated to furnish their ESG performance through the Business Responsibility Report (BRR). However, the regulatory framework took a significant stride forward from the fiscal year 2023 with the introduction of the Business Responsibility and Sustainability Report (BRSR). This enhanced reporting mechanism elevates transparency by demanding disclosures across nearly 1600 data points encompassing various facets of ESG considerations. Furthermore, starting from the fiscal year 2024, the top 150 companies are obligated to seek “reasonable assurance” concerning core ESG indicators, underscoring the heightened scrutiny on ESG practices within corporate governance.

The significance of ESG scores cannot be overstated in this evolving landscape. Ranging from 0 to 100, these scores serve as a barometer for investors to gauge a company’s sustainability and ethical performance. A score below 50 signals potential weaknesses, while a score surpassing 70 is indicative of commendable performance.

At its core, ESG scoring evaluates how effectively a company manages risks and addresses concerns pertaining to Environmental Stewardship, Social Responsibility, and Corporate Governance. These scores furnish investors with a comprehensive framework to compare companies across diverse metrics, ranging from carbon footprint to labor practices.

Environmental, Social, and Governance (ESG) scores are an essential tool for investors to assess a company’s sustainability and ethical performance. These scores typically range from 0 to 100, with a score of less than 50 considered relatively poor and more than 70 considered good.

ESG rating agencies are third-party companies that create ESG scoring systems. Each agency has a unique methodology and set of criteria for evaluating companies. Some rating agencies use a 0–100 scale, while others, like MSCI, classify companies as leaders, average, or laggards. According to MSCI, a “leader” (rated AAA and AA) indicates that a company leads its industry in managing the most significant ESG risks and opportunities. “Average” (rated A, BBB, or BB) companies are described by a mixed or unexceptional track record of managing ESG risks and opportunities relative to industry peers. A “laggard” (rated B or CCC) trails its industry based on its high exposure and failure to manage significant ESG risks.

Beyond rating agencies, the ESG ecosystem encompasses a myriad of stakeholders, including advisors, consulting firms, audit firms, and assurance agencies, among others. ESG has emerged as a burgeoning area within consulting firms, reflecting the escalating demand for expertise in sustainable practices and responsible investing.

As India embraces the principles of sustainability and ethical governance, the proliferation of ESG initiatives underscores a collective commitment to fostering a more resilient and equitable future. By leveraging robust reporting mechanisms and diverse expertise, stakeholders are poised to navigate the complexities of ESG integration with diligence and foresight.

Scroll to Top