CIRC RegTracker tracks the economic regulatory institutions, their capabilities, performance, and the way they interact with other institutions in shaping economic governance in India. It is being published regularly by the CUTS Institute for Regulation & Competition, a body involved in enhancing knowledge and strengthening capacity in the area of interplay between law and economics.
RegTracker is a quarterly publication which has been tracking the current policy changes/policy proposals on economic regulations in the country, based on news reports. It does not claim to provide an in-depth analysis of developments but raises some points to ponder, as food for thought and deeper analysis by policymakers and researchers. We are pleased to share the latest issue of RegTracker (RT.027, Jan-Mar 2019). It covers information about sector wise developments on the regulatory and policy aspects. Keeping with our focus on regulatory governance in infrastructure sectors, in this issue we cover the following sectors:
F) Real Estate;
G) Telecom and
1. Allowing the open sale of coal from captive mines; a step towards coal reform
2.CERC takes the first initiative for establishing regional power market for South Asia
3.REITs and InvITs: Easier rules proposed by SEBI to increase the access of these instruments to investors
4. Government announces FAME II with an INR 10,000-crore outlay
5.Mandatory medical device CDSCO certification
6. The RERA Panel and Uttar Pradesh RERA seek amendments in the law
7. 4G spectrum allocation to BSNL, MTNL
8. Overexploitation of groundwater: is a tax on groundwater use a way out?
Allowing the open sale of coal from captive mines; a step towards coal reform
The cabinet approved a much-awaited policy, which allows captive coal miners to sell their 25 percent of coal output in the open market. This comes after a tepid response to captive coal bidding announcement by the government. This was expected after the government allows commercial coal mining policy where they put several coal blocks under competitive bidding for the private players and offered the entire coal output for commercial sale in the market.
This is expected to hit the monopoly of CIL (Coal India Limited) over the coal sector in India. Earlier, any excess coal from captive mining would have mandatorily sold to CIL under their fixed pricing points, which did not incentivize many private players to produce more. Experts believe that this step is a step forward to bring in much-needed coal reforms to this sector.
[February 20, 2019, Business Today]
Points to Ponder
As per industry estimates, coal production from captive blocks allocated to thermal power producers is estimated to reach 105 million tonnes (MT) by 2021-22. As of February 2019, the output from captive coal mines reached 44.41 million tonnes against the target of 40 Million tonnes for FY 2019. This is an impressive figure while comparing the previous production from captive coal blocks.
While coal-based power plants are struggling with their Plant Load Factor (PLF) going down over the years, one of the major reason is attributed to poor coal supply of CIL. It controls over 80 percent of the total coal production in India and a monopoly in the coal sector in India. Private players are in the fray but only through the captive coal block mining.
Earlier, any coal output from captive mines can only be used in the respective linked plants; there is no incentive to produce more. Even coal cannot be transferred to other plants linked to the private party and any excess coal produced would be handed over to CIL.
However, with 25% of the coal output open to the market, private players are bound to make a beeline to the upcoming coal blocks put for captive mining. This provision along with commercial coal mining policy would be a big boost to the coal sector, which would help in, bring a competitive market in the coal sector and increase transparency and competitiveness in the sector. This is a text block. You can use it to add text to your template.
CERC takes the first initiative for establishing a regional power market for South Asia
From April 2016 to February 2017, India exported around 5,798 million units to Nepal, Bangladesh and Myanmar, which is 213 million units more than the import of around 5,585 million units from Bhutan, according to the Central Electricity Authority. The Central Electricity Regulatory Commission (CERC), extending its proposal for facilitating cross border power trade has mulled of setting up a regional market for power trade across South Asian countries. After several rounds of discussion with stakeholders and members of SAARC countries, it was decided that a common platform for trading electricity is required in the southeast region to fully utilize the potential and complementarities present in each country.
Currently, any transactions between nations take place through bilateral agreements but there is no established market present for multilateral trading between neighboring countries. A structured regional power market based on commercial, regulatory and legal framework is the need of the hour. With the expansion of the network, need-based transactions can be feasible under institutional cooperation between countries which is backed by standards pertaining to commercial and technical operations. India has entered into separate bilateral agreements with Bangladesh, Nepal, and Bhutan for cross border trade of electricity. India imports around 1450 MW from Bhutan and exports around 500 MW to Bangladesh, and 300 MW to Nepal. SAARC countries have already entered into a framework agreement for energy cooperation aimed at promoting energy trade, developing clean energy and energy efficiency, among others. However, there has not been much progress in electricity trade under this framework.
[March 12, 2019, The Hindu Business Line]
Points to Ponder
While India is having bilateral contracts with its neighboring countries for the trade of power, there was no option for other countries to trade power by using the Indian grid as an intermediary. Thus, Bangladesh is not able to source power from Nepal and vice-versa. There were several discussions of establishing a regional power pool market but there was never any progress to that. The major constraint is the political risk and investment concerns attached to the market. Also, the apprehension of neighboring countries on the dominance of India in calling the trade rules are also a deterrent to establishing such a market in South Asia.
Among others, serious discussions on the nature of the investment, point of connection, corridor allocation, congestion management, and pricing have been happening since last decade. How the investment for transmission corridor will be shared between countries? What will be the role of private players? How the pricing will be discovered? Whether a fair play can be assured to players of other countries? These are some of the pressing concerns apart from the regulatory mechanisms to deal with that.
However, putting an end to all speculations, CERC has taken the first initiative to come up with a structure of establishing a regional power market, which is a welcome step. In its guidelines, a framework is proposed for basic rules of commercial and operational procedures for the regional market. The regulatory guidelines are much appreciated by the member countries and now being discussed in details for the feasibility aspect. It is expected that the regional power market will be operationalized soon with political will from other countries in sync to create a better and economic prosperous south Asia in the region.
REITs and InvITs: Easier rules proposed by SEBI to increase the access of these instruments to investors
The Securities and Exchange Board of India (SEBI) recently came out with proposed new rules to make REITs and InvITs more attractive for the investors. In addition, SEBI has been proposed to increase the existing leverage limit for InvITs from existing 49 percent to 70 percent. The enhanced limit will be available specifically for the acquisition of new infrastructure assets.
The proposed new rules provide flexibility to the issuers in terms of fundraising and increasing the access of these investment vehicles to investors. Under the new rules, the issuer will be allowed to offer a smaller lot and the minimum allotment size for publicly issued REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts). Now, the minimum application and allotment lot shall be of 100 units at the time of initial/follow-on issue/offering, and the value of one such lot (100 units) shall be within the range of INR 15,000–20,000. Currently, the minimum subscription from any investor in an initial offer and follow-on public offer for REITs and InvITs is not less than INR 2 lakh and INR 10 lakhs respectively with the prescribed trading lot for the purpose of trading of units on the exchange is INR 1 lakh and INR 5 lakhs respectively.
Following a popular model from some of the advanced markets globally, SEBI in 2014, allowed the listing of trusts under Real Estate Investment Trusts (REITs) Regulations. However, In India, these investment vehicles failed to attract investors in the past. Only three InvITs have been issued and listed so far with about units raising approximately INR 10,000 crores and only one REIT is in the process of making a public offer.
Separate framework for privately placed InvITs
SEBI has proposed a separate framework, to enable unlisted privately placed InvITs. The framework thus allows the issues to determine the number of investors in a privately placed InvITs and the extent of investment by a single investor. Although, other proposed frameworks put forward INR 1 crore as the minimum investment by an investor and leverage should be determined by the issuer after consultation with the investor.
The listing of privately placed InvITs is not permitted on recognized stock exchanges and existing privately placed listed InvITs may choose to migrate to the proposed framework, after obtaining the approval of more than 90 percent of their unit holders by value and exit may be provided to dissenting unitholders. Consequently, delisting such privately placed InvIT from the stock exchanges.
On the other hand, an unlisted privately placed InvIT may choose to list its units on stock exchanges, after complying with the requirements as applicable for a privately placed and listed InvIT.
[Jan 25, 2019, PTI, Economic Times]
Points to ponder
The government came out of Real Estate Investment Trusts (REITs) Regulations in 2014 to increase the reach of the Indian financial market. However, the results as seen until date were not very convincing and only a few success stories are there to be shared. Easing norms is a welcoming step and it will create a win-win situation for all stakeholders, including the government, the issuers, and the investor. The new liberalized norms aim to gear up the market for REITs and InvITs and to increase the participants in this sector. With the new rules in place, the minimum investment in REITs and InvITs can be as low as INR 15,000 – opening the scope of investment in the sector for the retail investor.
Another good step taken is to increase the existing leverage limit for InvITs from existing 49 percent to 70 percent to provide greater scope for the issuer to raise capital. Although being good for the issuers, the investors should not be overlooked and strict measures should be taken to ensure the credibility of such issuers who are increasing leverage beyond 49 percent. Some of the initiatives proposed by SEBI that can be implemented are:
– Additional financial disclosures on a quarterly basis along with specific details of debt and interest service coverage ratios and quarterly valuation of assets.
– AAA credit rating of consolidated debt and project debt – to be certified by a rating agency registered with the SEBI.
– Minimum record of accomplishment of at-least 3 years of a continuous distribution of post listing.
Overall, the step taken by the regulatory is a forward-looking step and if it gains the investors’ confidence, it might help Indian financial market (especially the debt market) move steadily towards a more mature one.
Government announces FAME II with an INR 10,000-crore outlay
For the promotion of manufacturing of electric and hybrid vehicle technology and to ensure sustainable growth of the same, Department of Heavy Industry launched a scheme called FAME-India Scheme [Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles in India] on 1st April 2015 with the total outlay of INR 895 crore. In March 2019, phase II of the scheme has been announced with the total outlay of INR 10,000. This scheme will be implemented over a period of 3 years starting in April 2019. This scheme offers upfront incentives on the purchase of EVs and aims to establish the necessary infrastructure for EVs. It aims to target two birds with one stone by addressing the environmental pollution issue as well as India’s fuel security. This scheme will support 10 lakh registered electric two-wheelers with a maximum ex-factory price with an incentive of INR 20,000 each; 5 lakh e-rickshaws having ex-factory price of up to INR 5 lakh with an incentive of INR 50,000 each; 35,000 electric four-wheelers with an ex-factory price of up to INR 15 lakh with an incentive of INR 1.5 lakh each; 20,000 strong hybrid four-wheelers with ex-factory price of up to INR 15 lakh with an incentive of INR 13,000 each; 7,090 e-buses with an incentive of up to Rs 50 lakh each having an ex-factory price of up to INR 2 crore. The scheme will have an INR 1,500-crore outlay in 2019-20; INR 5,000 crore in 2020-21 and INR 3,500 crore in 2021-22. This scheme will be implemented and monitored by an inter-ministerial empowered committee,’Project Implementation and Sanctioning Committee’ (PISC), headed by the heavy industry secretary.
[March 9, 2019, PTI, Business Today]
Points to ponder
It is a great move toward addressing environmental issues. Moreover, India is a net importer of fuel and adoption of EVs would bring fuel security. NITI Aayog and Rocky Mountain Institute (RMI) release technical analysis of FAME II Scheme according to which the vehicles covered under the scheme can cumulatively save 5.4 million tons of oil equivalent over their lifetime worth INR 17.2 thousand crores.
However, the scheme has some shortcomings, as well. This scheme has a 50% localization rule i.e. only the companies that produce 50% localized vehicles can avail the incentives. The manufacturers may not be able to avail many incentives related to this. AT present, the volume of EVs produced here is low, due to which there is low domestic production and supply of components. Thus, the localization condition is not very helpful to meet the target. It is rather a deterrent.
Further, with India being a two-wheeler heavy market, the eligibility criteria for incentives for two-wheelers that leaves out 95% of the electric two-wheeler models may defeat the purpose. To avail the subsidy, e-scooters need to have a range of at least 80 km while most e-bikes in India currently have a range of around 60 km. It appears that the incentive eligibility criteria are not well thought out to have an optimal outcome.
Mandatory medical device CDSCO certification
In February 2019, the Ministry of Health and Family Welfare issued a gazette notification adding all implantable medical devices such as cardiac stents, orthopedic and ocular implants etc…, CT scan equipment, MRI equipment, defibrillators, dialysis machines, PT equipment, X-ray machines and bone marrow cell separator as drugs under Section 3 (b) (iv) of the Drugs and Cosmetics Act, 1940. The regulation will be implemented from April 2020. The number of devices to be specified as drugs has now increased from 23 to 31. All these devices would require the same checks as drugs. Further, in April, the Drugs Technical Advisory Board (DTAB), the highest statutory decision making body on technical issues related drugs and medical devices in India, recommended to notifying all medical devices as “drugs” under the Drugs and Cosmetics Act, and certify all import, sale and manufacture of implantable medical devices by CDSCO. With the TTAB’s decision, the Health Ministry will now be required to issue either separate rules or an executive order based on these recommendations and the Central Drugs Standard Control Organisation (CDSCO), the country’s medical device regulator, will implement the rules thereafter. This move came after medical implants sector malpractice was exposed worldwide as well as India where a complete lack of regulation was revealed.
[Feb 09, 2019, Hindustan Times]
Points to ponder
The intent of mandating the certification of medical devices is reasonable, given the risk involved. However, considering the medical devices as drugs does not make much sense. This should be regulated under a separate law for medical devices as these are engineering items and not medicines to be regulated as drugs.
Further, this decision has been taken without any consultation with all the stakeholders. There are several medical devices brought under this, which would need a check for certification. To have such checks, more manpower with various specialists and infrastructure would be required. As of now, there are insufficient testing labs. Thus, the 2020 deadline also seems unachievable.
Further, there is an involvement of multiple departments, too, for this process, which could complicate the matter. With a separate law and a single department to overlook the process, it may be more efficient.
F. Real Estate
The RERA Panel and Uttar Pradesh RERA seek amendments in the law
Recently, the RERA Committee and the Uttar Pradesh RERA body has proposed to amend a few provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA Act). At a nascent stage, the RERA bodies across the states are facing challenges in enforcing the law. Owing to the frauds committed by a few builders in U.P. against homebuyers and banks, the Uttar Pradesh RERA has been flooded with numerous complaints from the homebuyers. The body has been facing hardship to resolve a buyer’s issue in a timely manner of 15 days or a month because it does not possess the power to issue directives to the municipal, industrial or other government agencies in matters related with homebuyers’ complaints. In addition, the body faces legal glitches in resolving the cases from homebuyers if the same is pending before the National Company Law Tribunal (NCLT) or National Consumer Disputes Redressal Commission (NCDRC). In this background, the chairperson along with members of the Uttar Pradesh RERA had written to the ministry of housing and urban affairs and to the Uttar Pradesh government to amend the RERA Act to ease the enforcement of the law. The body mentioned three points for amendment in the letter: First – to provide directive powers, second – to bar NCDRC from hearing homebuyers’ cases, and third- to bar NCLT from hearing insolvency cases against realtors’ until more than 10% buyers (out of the total number of purchased flats in a housing project) approach the Tribunal for justice. Further, the RERA committee also proposed an amendment to section 6 of the RERA Act. The committee in its second meeting recommended extending the registration of the project beyond a year from the scheduled date of completion. As per section 6 of the RERA Act, the registration period cannot be extended beyond 12 months under any conditions. This proposal of the committee has attracted objection by a pan-India homebuyers’ body – the Forum for People’s Collective Efforts (FPCE), on the grounds that it would result in dilution of the object of the Act and
he RERA Panel and Uttar Pradesh RERA seek amendments in the law
Recently, the RERA Committee and the Uttar Pradesh RERA body has proposed to amend a few provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA Act). At a nascent stage, the RERA bodies across the states are facing challenges in enforcing the law. Owing to the frauds committed by a few builders in U.P. against homebuyers and banks, the Uttar Pradesh RERA has been flooded with numerous complaints from the homebuyers. The body has been facing hardship to resolve a buyer’s issue in a timely manner of 15 days or a month because it does not possess the power to issue directives to the municipal, industrial or other government agencies in matters related with homebuyers’ complaints. In addition, the body faces legal glitches in resolving the cases from homebuyers if the same is pending before the National Company Law Tribunal (NCLT) or National Consumer Disputes Redressal Commission (NCDRC). In this background, the chairperson along with members of the Uttar Pradesh RERA had written to the ministry of housing and urban affairs and to the Uttar Pradesh government to amend the RERA Act to ease the enforcement of the law. The body mentioned three points for amendment in the letter: First – to provide directive powers, second – to bar NCDRC from hearing homebuyers’ cases, and third- to bar NCLT from hearing insolvency cases against realtors’ until more than 10% buyers (out of the total number of purchased flats in a housing project) approach the Tribunal for justice. Further, the RERA committee also proposed an amendment to section 6 of the RERA Act. The committee in its second meeting recommended extending the registration of the project beyond a year from the scheduled date of completion. As per section 6 of the RERA Act, the registration period cannot be extended beyond 12 months under any conditions. This proposal of the committee has attracted objection by a pan-India homebuyers’ body – the Forum for People’s Collective Efforts (FPCE), on the grounds that it would result in dilution of the object of the Act and would act against the interest of consumers in real estate. Under section 4 of the Act, every promoter is required to make an application to the Authority for registration of the real estate project for a period declared in the application. The same can be extended by the authority under section 6 for a period of one year only on grounds of force majeure. However, the Bombay High Cour has ruled that under exceptional circumstances and in the interest of homebuyers, the registration can be extended beyond one year. This proposal of the committee is likely to attract opposition from all homebuyers’ bodies.
[Mar 04, 2019, Hindustan times]
Points to ponder
The Real Estate (Regulation and Development) Act, 2016 is a central act enacted to safeguard the interests of the homebuyers and to boost investments in the real estate industry. The states across India have established their Real Estate Regulatory Authorities to enforce the provisions of the law. Whilst the authorities are well equipped, they are facing challenges in the enforcement as the law has certain loopholes, which calls for amendment in the RERA Act. To address these loopholes, the ministry of housing and urban affairs formed a RERA Committee in December 2018 to study the struggles in enforcing the provisions of RERA and to remove difficulties in implementation of the Real Estate (Regulation & Development) Act, 2016. Apart from approaching RERA for redressal of the grievances, the homebuyers can also approach NCLT as ‘financial creditor’ under Insolvency and Bankruptcy Code, 2016 and NCDRC as a ‘consumer’ under Consumer Protection Act, 1986. The Supreme Court in the case of M/S Amarapali Sapphire Developers Pvt. Ltd. v. M/S Amarapali Sapphire Flat Buyers Association clarified the position that a group of homebuyers can directly approach NCDRC if the claim exceeds the threshold of one crore rupees. The mentioned legal overlaps have posed various challenges for the RERA authorities to provide speedy dispute redressal to the complainant and thus calls for a revisit.
4G spectrum allocation to BSNL, MTNL
The Department of Telecom (DoT) has circulated a draft cabinet note for comments from key ministries on 4G spectrum allocation for two loss-making state-run telecom enterprises: Bharat Sanchar Nigam Limited (BSNL) and Mahanagar Telephone Nigam Limited (MTNL). BSNL that had a debt of around 13,000 crore INR in FY 2018 and MTNL with a debt of around 20,000 crore INR had requested the Telecom Regulatory Authority of India (TRAI) for 4G spectrum allocation through equity infusion route, outside the auction. On seeking a recommendation by the DoT from the regulatory body, the TRAI indicated that the final decision on 4G spectrum allocation to BSNL-MTNL lies with the government.
[April 22, 2019; Business Standard]
Points to ponder
BSNL, that was formed in 2000 and started its’ mobile operation in 2002, has been facing a continuous decline in its market share and profit after the entry of Reliance Jio Infocom in September 2016. Among others, the main reason for its’ declining market share and low operating margin is its’ difficulty to offer 4G services in the bands available with it. To survive intense competition, the two PSUs in a report submitted to the DoT, Government of India (GoI) indicated the additional capital requirement of 20,000 cr. INR to upgrade it’s’ existing 80,000 2G and 3G sites to 4G and to set-up 20,000 towers.
In this regard, the circulation of the draft cabinet note by the DoT for comments by ministries on 4G spectrum allocation is a welcoming move. Provided, all major players in the telecom market have already gone far ahead in delivering 4G services, and are now entering into the 5G race, the 4G spectrum allocation to the two PSUs is essential for their continued market presence. But, at the same time, such allocation should be accompanied by strict performance guidelines. The long-term implementation of 4G services requires efficient market analysis, increased efficiency, and, top management’s commitment, credibility, accountability, and competence. Keeping this in mind, the DoT, based on the recommendation of the interim report of the Indian Institute of Management – Ahmadabad, can provide spectrum initially for 5 year’s period (instead of usual 20 year’s period) conditional upon BSNL’s ability to transform itself to the competitive role. This license can further be extended based on satisfactory performance in the initial 5 years.
To deal with intense competition in the market, the PSUs, in addition to 4G spectrum allocation, need organizational restructuring with a change in the work culture. Mere allocation of 4G spectrum to BSNL would not serve its purpose of the PSU’s revival. Such a step should be accompanied by measures to tackle other challenges that the PSU is facing. These challenges are lack of proactive approach to market competition, lack of innovation, high cost, bureaucratic inefficiency, and other structural and professional issues.
Spectrum allocation involves opportunity cost and capital expenditure. The capital requirement can be met with the infrastructure sharing option, while operational efficiency can be increased with technical and managerial training of executives and staff with the potential capacity to improve the performance.
Overexploitation of groundwater: is a tax on groundwater use a way out?
In an intrepid move, the Centre government has proposed to induce a Water Conservation Fee (WCF) on groundwater extraction for the first time for all users including industrial units, all business establishments and infrastructure projects, such as residential complexes, office buildings, hotels and hospitals with an exception of the armed forces, farmers and individual households. The user would have to pay WCF, which, may vary from INR 1 to INR 100 per cubic meter of water extracted.
India is the world’s largest user of groundwater, withdrawing over 250 cubic kilometers per year, more than twice that of the US. The rate of groundwater extraction is so severe that NASA’s findings suggest that India’s water table is declining alarmingly at a rate of about 0.3 meters per year. The report submitted by the Parliamentary Committee on Restructuring the Central Water Commission and the Central Groundwater Board (CGWB) (2016), highlighted the unjustifiable over-extraction and undue exploitation of groundwater resources in the country. According to the latest survey by the CGWB, Andhra Pradesh, Tamil Nadu, Kerala, and Karnataka are in a worse state as far as groundwater decline is concerned. Up to a quarter of India’s harvest has been projected to be at threat due to depletion of groundwater. In addition, the Standing Committee of Water Resources in its 23rd report (2017-18) underlined that by 2020, 21 major cities, including Delhi, Bengaluru and Hyderabad are expected to reach Zero Ground Water levels affecting access for 100 million people. Given such an alarming situation, what could be the possible consequence of over-extraction of groundwater?
In an attempt to discourage overexploitation of groundwater and ensure a more robust groundwater regulatory mechanism in the country, the prosecution of WCF is seen as the resoles to prevent the crisis situation.
[ January 14, 2019, The Hindu Business Line]
Points to ponder
At a time when groundwater touching alarmingly low levels (close to 32 percent of the blocks have been classified as semi-critical or over-exploited by the CGWB), the proposed Water Conservation Fee is an urgent need to change the status quo and should help curb over-extraction for this current watershed situation in the groundwater sector. Policies that promote the judicious use of groundwater in agriculture are also required. In India, groundwater is the main source of irrigation and accounts for over 65 percent of the irrigated area. Adoption micro-irrigation techniques  can be seen as one of the ways to reduce groundwater extraction. These suggested interventions along with WCF, have to be executed meticulously within the current framework, as groundwater is too critical a resource to be mismanaged.
 Drip and sprinkler irrigation can save about 50 percent of water compared to the conventional method of irrigation in water-intensive crops.