Dubai: A High Rise, Then a Steep Fall

By CHIP CUMMINS, STEFANIA BIANCHI and MIRNA SLEIMAN

DUBAI -- As financial crisis roiled much of the world in October 2008, the head of Dubai's biggest state-owned developer unveiled his latest megaproject: a $38 billion development that would include a tower nearly two-thirds of a mile tall.

"I'm sure most of you are asking why we're launching this, and you'd be mad not to question it," said the executive, Chris O'Donnell, at a news conference. Though there would be economic ups and downs in the years needed to build the tower, he told listeners, demand would continue to outstrip supply.

"The fundamentals in the market are too strong," he said. "There won't be a crash."

Since then, residential real-estate prices in Dubai have slumped by almost 50%. Developers have slashed jobs and scrapped projects. Groundbreaking on the tower was long ago put on hold. The yearlong retrenchment culminated in last week's surprise announcement that Dubai would seek to restructure $26 billion of debts owed by Dubai World, the holding company for many of the government's port, infrastructure and real-estate businesses.

View Full Image

Getty Images

A woman and child ride past the Burj Dubai skyscraper.

Behind this jolt was one of the world's most concentrated property bubbles. Some $430 billion worth of construction projects have been scrapped across the United Arab Emirates, a desert country with a population of just 4.5 million and an area smaller than South Carolina. The majority were slated for the emirate of Dubai, according to estimates by the Middle East Economic Digest, a regional projects tracker.

The boom was fueled by easy credit, a poorly regulated market overrun by speculators, and cheerleading from Dubai officials -- including the hereditary ruler, Sheik Mohammed bin Rashid Al Maktoum.

His vision for the city -- a tolerant, modern metropolis open to the world, its many faiths and some of its excesses -- has long rankled conservative Arab neighbors, including some officials in Abu Dhabi, the buttoned-down capital of the U.A.E. But for others, Dubai became a symbol of what a modern Arab state might achieve if it embraced the West and its financial system. President Barack Obama, in a June speech to the Muslim world in Cairo, singled out Dubai as a place where economic development worked.

Dubai's soaring skyline is a symbol of pride here. At a National Day parade this week, men dressed in traditional Arab garb pushed floats consisting of scale models of the city's iconic buildings. There were models of the Burj Dubai -- the world's tallest skyscraper, due to open next month -- as well as the sail-shaped Burj Al Arab hotel and the Mall of the Emirates, which houses an indoor ski slope.

"Our leaders have been able to achieve all of this," said Ahmed Al Hammadi, watching the parade. As for the current debt crisis, "we will come out of it stronger," he said.

Officials and developers justified the breakneck pace at which these were built by touting Dubai's proximity to both Asia and Europe, its tax-free and tolerant way of life and its position as the region's business hub. Foreign executives, architects and real-estate brokers flocked here for the seemingly limitless scope to pursue big projects. International debt and property investors bought into the dream, too, until global financial markets seized up and much of the world plunged into recession. Then, buyers began to bail out, employers shed staff and companies put expansion on hold.

The result is a jaw-dropping real-estate overhang. "To Let" signboards adorn the facades of dozens of recently finished buildings along Sheikh Zayed Road, the superhighway that cuts through the city's canyon of skyscrapers. Office vacancies in new buildings run at 41%, according to international property agency Colliers International.

After taking markets by surprise last week with a request to delay debt payments at Dubai World by six months or more, the government here said early Tuesday it would begin a multiphase restructuring effort aimed at the company's debt, including $6 billion related to lending by the state-owned property developer, Nakheel. It said the restructuring would include the assessment of "deleveraging options," including asset sales. Dubai World said it had started discussions with its banks and these were proceeding on a "constructive basis."

International securities markets recovered their poise after a scare, but the effects aren't just financial. The debt announcement appeared to open a fresh rift between Dubai and U.A.E. capital Abu Dhabi. Federal officials there were livid at being left in the dark by Dubai's decision to seek a debt standstill, say people familiar with the situation. The rift has the potential to unsettle an important U.S. ally in the Persian Gulf, because Dubai, as a re-export hub and offshore financial center for Iranian businesses, is seen as key to U.S. efforts to isolate Iran.

Dubai and Abu Dhabi officials have underscored unity in recent days. But while the U.A.E. federal government orchestrated a $10 billion bailout earlier this year for Dubai companies, it hasn't stepped in to offer assistance to Dubai World.

Dubai's growth began in the early 1980s when Sheik Mohammed and his father pushed to diversify the economy in the face of dwindling oil. Dubai built luxury beachside hotels to lure wealthy visitors from India, Asia and the Middle East, plus package tours from Europe and Russia. In 2002, Sheik Mohammed opened the door to foreign ownership of property in certain developments. With little more than a brochure and a floor plan, buyers began to slap down deposits on townhouses, apartments and villas that wouldn't be ready for years.

Aarti Chana was living in the U.K. in 2004 when Nakheel pitched a project called Palm Jebel Ali to prospective buyers. As the second piece of a spectacular development jutting out in the sea in the shape of a palm tree, Palm Jebel Ali would include homes built on stilts, forming a 7.5-mile chain spelling out an Arabic poem written by Sheik Mohammed. "It takes a man of great vision to write on water," the poem reads in part.

Many units would be ready for occupancy by December 2009, Nakheel said. Ms. Chana, now 38 years old, put 10% down on a $780,000 five-bedroom beachfront villa and, making plans to settle here, sold her house near London. "I believed in the Dubai story," she says.

In 2006, Sheik Mohammed consolidated a handful of government businesses into the Dubai World holding company, with Sultan Ahmed bin Sulayem as its leader. To head Nakheel, Mr. Sulayem, in turn, plucked Mr. O'Donnell from Australia, where he headed a fast-growing property fund.

Messrs. Sulayem and O'Donnell declined to comment for this article. A spokesman for Nakheel didn't respond to emailed questions, nor did a spokesman for Dubai's ruler.

Nakheel was on a roll, preparing to open the first of the palm developments, Palm Jumeirah, and planning the next two. In September 2006, at a separate, 914-acre residential community called Jumeirah Park, villas starting at $654,000 sold out in a day. International banks and local lenders offered loans for up to 97% of the purchase price.

To help finance all this construction, Mr. O'Donnell turned to the bond markets. An investor presentation in November 2006 called Dubai a "vantage access point" that would draw in businessmen from a wide swath of the greater Middle East, from India to Egypt. It projected that Dubai's population, then just under 1.2 million, would grow by two million in 14 years.

Investors rushed to buy a piece of Nakheel's Islamic bond, known as a sukuk. Swamped by demand, the borrower increased the issue's size to $3.5 billion.

That year, Dubai's real-estate sector raised $4.9 billion through bonds and syndicated loans, according to data provided by Thomson Reuters. Real-estate borrowing soared in 2008 to $30.4 billion.

In 2007, a Dubai World affiliate bought the Queen Elizabeth 2, unveiling plans to moor the ocean liner at the Palm Jumeirah and turn it into a luxury hotel.

By then, cracks in the real-estate market were forming. Officials had put few regulations on development that might limit the speculation. Now, concerned that the market had grown overheated, they did so. And in early 2008, authorities embarked on a series of high-profile corruption investigations at some big real-estate and finance firms.

But police, courts and the companies themselves disclosed little about the probes. As a result of the lack of transparency, the crackdown on corruption, instead of comforting investors, spooked them.

"There is a complete distrust by investors in the system," said Michael Diaz, a Miami-based attorney with offices in Dubai. Dubai and U.A.E. officials say they have made efforts to improve the legal system.

In April 2008, police detained the Lebanese-American chief executive of one of Dubai's top developers. The company didn't disclose the arrest until after it was reported in the press. He denied wrongdoing

A string of other detentions followed at some of Dubai's biggest companies, including Nakheel. A Nakheel spokesman didn't answer emailed questions about the probe.

Typical was the case of British developer Arthur Fitzwilliam, an affable 58-year-old polo fan from London. He had lived in Dubai for two decades, dabbling in real estate and other ventures. In 2004, he inked a deal to develop a 14.5 million-square-foot plot of desert acquired from a government-controlled company.

The Plantation Equestrian and Polo Club would have air-conditioned stables for 800 horses, four polo fields, facilities to host horse shows and a five-star hotel. Mr. Fitzwilliam sought partners to help finance the project. A British banker agreed to provide financing, in exchange for a 30% stake, Mr. Fitzwilliam said in an interview.

But in June 2008, authorities detained Mr. Fitzwilliam, the banker and one other. Then in September, Dubai Islamic Bank, or DIB, foreclosed on the land for the project. It also seized more than 100 polo ponies, Mr. Fitzwilliam said. For almost a year, he sat in jail before charges were filed. In March 2009, authorities charged seven men with scheming to defraud DIB, according to a bill of indictment filed by Dubai's public prosecutors. Mr. Fitzwilliam was accused of aiding the scheme.

Last month, he was transferred to a Dubai hospital to undergo tests for cancer. Four Dubai police officers stood guard outside his room.

Mr. Fitzwilliam denied any wrongdoing, as did the British banker he was working with. "I want a fair trial, and I'm prepared to go with the system," he says, shackled to his hospital bed. "Anyone who knows the case knows I'm not guilty."

A spokesman for the Dubai prosecutor's office didn't respond to requests for comment.

Amid the uncertainty surrounding the arrests, the crisis roiling the rest of the world was catching up with Dubai. When global credit markets froze up in late 2008, international investors stopped buying Dubai property. Some who had already bought stopped making installment payments. Nakheel and others shed staff and scrapped or delayed dozens of projects.

Last February, the troubles touched Ms. Chana's plan for a new home in Dubai. Nakheel halted work on the Palm Jebel Ali. Though dredging had been done, little construction had.

Ms. Chana says she has sunk about $550,000 into her still-unfinished home. Earlier this year, she flew to Dubai to try to salvage the investment. She is living in a hotel-apartment with her daughter, helping to organize other investors and petition Nakheel for rebates. "I just won't let this drop," she says. "It's become my obsession."

In October, Nakheel proposed that Jebel Ali investors transfer their contracts to property elsewhere that is already finished or close to it.

Simon Murphy bought a $240,000 ground-floor apartment in the Palm Jumeirah in 2002 and moved in five years later. He is now a "resident representative" to Nakheel, like being part of a homeowners board. He says that in recent weeks, Nakheel has cut back on maintenance, including tree trimming.

Since Dubai's debt-standstill announcement, Mr. Murphy says, many apartment residents have stopped paying management fees, typically around $700 a month. Nakheel declined to comment. "Most people fear that their money will go into the bottomless pit of Nakheel debt," Mr. Murphy says.

—Andrew Harrison and Maria Abi Habib contributed to this article.
Source:WSJ

Amendments in Taxability of Non-resident by CBDT

15 November 2009

Lately, the Central Board of Direct Taxes or CBDT
 (which is the highest ranking executive authority for
 income taxes in India) has withdrawn several of
its circulars / instructions, which NRI4were relied
 upon by foreign companies and non resident taxpayers.

In July this year, the CBDT withdrew its Instruction
No. 1829 dt. 21 September 1989, which relaxed
the taxability of consortium of foreign companies
 engaged in execution of turnkey power projects.
n yet another such instance, the CBDT has recently
issued Circular No. 7/2009 on 22 October 2009,
withdrawing its following circulars:

• Circular No. 23 dt. 23 July 1969,

• Circular No. 163 dt. 29 May 1975; and

• Circular No. 786 dt. 7 February 2000.

The CBDT has cited that such withdrawal is on account
of their interpretation by some taxpayers, seeking to
 claim relief, which was not in accordance with the
 provisions of the Indian Income Tax Act (Act) or the
 intention behind these circulars. Circular No. 23
was issued by the CBDT to provide clarifications
 regarding taxability of foreign companies and
non-residents, engaged in specified business activities.

It provided that no tax shall be payable by non-residents
 in India, where they are engaged only in
principal-to-principal (P2P) sale of goods from
abroad to Indian importer(s), or to their Indian
subsidiary on an arm’s length basis, or in case of similar
P2P sale of plant and machinery to Indian importers on
installment basis. It also provided for non-taxability of
certain other incomes such as commission received by
foreign agents (of Indian exporters) operating in their
 own country, where the same is remitted directly
outside India. Another important aspect clarified by
 this circular (and subsequently, by Circular No. 163)
 was as regards the exemption of foreign companies
having a procurement office or agency in India,
where their operations were limited to purchase
of goods in India for the purpose of export.

Circular 23 emphasized that the Act does not seek to tax
the entire profits of a non-resident, where it carried out
 only a part of its business activities in India – and only
 that portion of the profits of a non resident is liable to
 tax in India, which can be reasonably attributed to the
 Indian operations of its business.

Yet another clarification was issued vide Circular No. 786,
regarding taxability of export commission earned by non-resident agents.

It was explained that where the services of such
an agent are rendered outside India, its commission
 income (in respect of export of goods from India) cannot
be taxed in India.

Over the last 40 years, various judicial
 authorities and courts placed reliance on these circulars
while pronouncing their judgments. One such landmark
decision was passed by the Supreme Court in the case
of Morgan Stanley and Co. Inc. (292 ITR 416), where it
was held that if an Indian enterprise is remunerated on
 an arm’s length basis, no further income would be left
to be attributed to the foreign enterprise and, therefore,
such enterprise would not be liable to tax in India.

Similarly, in the case of SET Satellite (Singapore) Pte Ltd.
(307 ITR 205) the Mumbai High Court, relying on the decision
 of Morgan Stanley and Co. Inc. and Circular No. 23,
affirmed the aforesaid proposition.

As a principle, circulars issued by CBDT are binding on
 the income tax authorities. But in the aforesaid cases
(and various others which are still pending for adjudication),
 the tax department challenged the applicability
of the CBDT circulars before the courts.

Circular No. 7/2009 also states that even when Circular 23 was in force,
 the revenue authorities have argued that it does not actually apply
to a particular case, or it cannot be interpreted to allow such a relief,
which is not in accordance with the provisions of the Act or the
intention behind the issue of the Circular.

Withdrawal of Circular 23 is likely to boost and complement
the case of revenue authorities in such other matters which
are pending adjudication. With the withdrawal of the
Circular No. 23, taxpayers will be unable to place direct
reliance on it. It is important to note that such withdrawal
does not necessarily mean that non-residents would be
 liable to tax in India, in situations described in these
circulars. Even so, in the absence of these circulars,
taxability of non-resident taxpayer needs to be evaluated
independently having regard to the provisions of the Act,
provisions of tax treaties and relevant judicial precedents.

Taxpayers may, therefore, need to evaluate and assess the
 impact of the withdrawal of the above circulars on their
transactions. It will be worthwhile to examine whether the
judicial interpretation on this subject materially different
from the interpretation adopted in the CBDT circular, and
will the principles set out in the CBDT circular continue to
apply in appropriate cases? The question is still open,
whether such withdrawal is in line with the principle of
justice, equity and good conscience, particularly when a
number of cases are pending adjudication on the subject matter.

It would also be interesting to witness further developments
on this issue, especially considering that a similar circular
issued in 2004 (dealing with taxability of non-residents which
outsource services to BPO units in India) continues to be in force
and is not sought to be withdrawn. Nonetheless such changes in
domestic tax laws may cause doubt about Indian tax regime
among non-resident tax payers. Considering the current
economic scenario, the Government must try to build
confidence in the stability of Indian tax regime and economic
 climate, particularly for foreign investors.

US banks failure toll reaches 123 so far in 2009

   
 15 November 2009,


NEW YORK: The number of bank failures in the US has continued
to increase with a staggering 123 entities going out of business so far this year,
despite the economy witnessing some signs of recovery.

The authorities shut down three banks -- Orion Bank based
 in Naples, Pacific Coast National Bank in San Clemente
and Century Bank F.S.B of Sarasota on November 13,
 taking the count of failed banks to 123 this year.

The Federal Deposit Insurance Corp (FDIC), which was
 named the receiver of the failed banks, took over
Orion Bank, with about USD 2.7 billion in assets and
 USD 2.1 billion in deposits and Century Bank with
USD 728 million in assets and USD 631 million in deposits.

Meanwhile, Pacific Coast National Bank was also
 shut down. It had USD 134.4 million in assets and
 USD 130.9 million in deposits.

In addition, FDIC had entered into a purchase and
assumption agreement with Iberia Bank of Lafayette,
Louisiana, to assume all of the deposits of Century Bank, FSB.

However, the maximum number of collapses this year
 took place in July, when 24 banks were closed down,
 while 20 entities bite the dust last month.

Despite the slowly improving economic situation,
soaring unemployment rate have resulted in rising
defaults, primarily impacting the small and medium banks.

Frequently asked question on Annual Tax Statement (ATS)

What is the annual tax statement?

The annual tax statement is a list that contains
 details about all the tax deducted at source (TDS)
or tax collected at source (TCS) for a particular
permanent account number. This amount may
 be deducted either by an employer in case of
 salaried individuals or by bank for fixed deposits, etc.

The ATS will tell you the amount deducted as tax for
your PAN in a particular year. So, if tax has been
deducted by someone in 2008-09, the letter from
 TIN will state ATS for Assessment Year 2009-10
 (when you pay taxes for income earned between
April 1, 2008 and March 31, 2009).

TIN creates the statement based on the information
submitted by the organisations who have deducted
tax from the money paid to you. The information
contained there has to be verified by you.

When do I get the statement?

You would have received a similar mail from TIN
of National Securities Depository Ltd (NSDL) earlier,
when your company or bank filed its returns.
Companies usually file returns beforeindividuals .
So, if a company, your employer or your bank cuts tax
 before paying you ther amount due, the same would be
mentioned in the company’s returns. The first ATS would
have landed in your account during March-April 2009.

The second one would be sent to you after you file
your income-tax return, the deadline for which was July 31.
This second statement would also containthe tax that you paid in excess to the one deducted by banks or employers.

What to do with the ATS?

You need to check this document thoroughly and
ensure that all the tax paid by you is reflected with
an ‘F’ (meaning final) mentioned in the ’status’ column.
The ATS has three parts — the tax deducted at source
(TDS) in Part A and the tax collected at source (TCS) in
 Part B. When you deposit tax in a bank as self-assessment
or advance tax via a challan, the same would be reflected in Part C.

The status of the tax credit too would be mentioned besides
 the tax entry, using three letters — P for provisional,
U for unmatched and F for final.

A provisional status means the tax paid has been shown
 because the organisation that deducted your tax mentioned
it in its returns. This would turn to final on verification.

Thedetails you submit in your returns need to match with
the ones submitted by your tax deductor or collector.

Unmatched would mean the deductor has not yet deposited
the taxes or has provided incorrect details of tax payment.
Sometimes, a final status will not appear if the payment
 details in the bank don’t match the details of deposit in
the TDS or TCS return, or if your employer has not yet
submitted the tax cut from your salary.

When and why was this exercise started?

This mailer is being sent to most tax-payers since the
past two years, when the income-tax department moved
to a separate system of filing and submitting returns without
any attachments such as Form 16, TDS certificates, etc.

As there was no proof of tax deducted or collected,
 with the income-tax department, they were finding
it difficult to process the returns.

Hence, the ATS was initiated to tell individuals about
the tax credited under their permanent account number.
It is claimed that the process would help the I-T department
 process returns faster like in the US, where refunds are given
 to theindividuals within two months’ time.

This year, the income-tax department claims that between
April 2009 and July 2009, they have given out refunds worth
Rs 20,768 crore, which is 53% more than Rs 13,542 crore
 given out during the same period last year.

Why should you check the ATS?

The statement will be referred to by the income-tax
department while processing your income tax return.
So, if the data provided by you doesn’t match that
provided by deductors, then your return won’t be
accepted until it is corrected. Only the deductor has
the right to correct the ATS data, not the individual
on whom the data has been entered.
The ATS sent for this assessment year notes
“The statement is being sent to enable you to
 take up the matter pertaining to any deficiencies
 in your statement with your deductor at the time
of taking the TDS certificate( s) at the end of the
financial year. This would also ensure that complete
and correct tax credit is available to you at the time of
 filing of the income-tax return for the assessment year 2009-10.”

Why could there be discrepancies in the ATS?

Your tax credit could be erroneous if the deductor
or collector has not filed its quarterly TDS/TCS return,
 or has either not quoted or wrongly quoted your PAN
in its return. It may also happen if the deductor has not
paid the required TDS to the government account.
If you have not provided your PANdetails, the
employer or bank may not be able to submit your
tax details as PAN is mandatory for submission.
 In case of any such errors, you must persuade the
deductor to rectify the mistake.

If you don’t correct it…

Tax credits would be given to you only
on the basis of the tax statement.
The income-tax department has stated:
“The same (tax credit) should be verified before
claiming tax credit and only the amount which
 pertains to you should be claimed.” NSDL
will send you a fresh tax statement after the
deductor corrects the data provided earlier.

Whom to contact in case of queries?

In case you are still have queries on the ATS,
you can call 020-2721 8080 or contact NSDL
via fax at 91-20-2721 8081 or email them at
reply@nsdl.co. in or tininfo@nsdl. co.in

Do you have to register to get ATS?

If you have not been getting ATS and want register
 or see the tax credits given to you, you can register
 for the same.

Details are available at www.incometaxindia.gov.in and www.tin-nsdl.com .

Proposal to give FM power to approve foreign investments of up to Rs 1,200 crore

Nov 10, 2009


The finance minister could approve foreign investments of up
to Rs 1,200 crore (Rs 12 billion), without going to the Cabinet,
if a proposal of the Department of Industrial Policy and
 Promotion to fast-track clearance of foreign direct investment is accepted.

At present, a project with investment of more than
 Rs 600 crore (6 billion) in sectors routed through
the Foreign Investment Promotion Board has to
 be referred to the Cabinet Committee on Economic Affairs.

“With the depreciation of the monetary value, it is
 considered appropriate to review the limit, which
 may be revised to Rs 1,200 crore (12 billion),”
according to a Cabinet note circulated by DIPP.
The Rs 600-crore limit was set in 1996.

DIPP has argued that the proposal would “enable
 FIPB to function more efficiently and reduce
 regulatory burden on foreign companies, leading
to enhanced level of foreign investments”.

India received $15.3-billion FDI in the first half
of this financial year. It is lower than
the $17.2 billion received in the first half
 of 2008-09, but the inflow is seen as healthy,
 given the global liquidity crunch.

There is also a proposal that the threshold for
CCEA approval be fixed for only the ‘foreign investment’
part of the project and not the total investment involved
 and its total cost.

The committee of secretaries is meeting on November 17
to review the country’s FDI policy, and the DIPP proposal
 to enhance the finance minister’s power is likely to be
discussed there.

Under the present dispensation, the proposals relating to
the sectors not under the automatic route go to the FIPB,
 which gives its recommendation to the finance minister

FM circulate discussion paper on Goods and Services Tax

By : Y.Prakash on 10 November 2009


With barely over four months left for the rollout of the goods and services tax,
states on Tuesday proposed that the new tax regime should subsume most
central indirect levies like excise and service tax as well as state taxes
like VAT, making it easier for business and industry.


The states released a discussion paper prepared by the Empowered
 Committee of their finance ministers in New Delhiwhich said the
GST should also replace cesses and surcharges at both the central
and state levels.

The much-talked about discussion paper did not give any idea
about rates and the items to be included in it.

However, it made some specific suggestions such as alcohol
and petroleum tax should be out of GST, while tobacco be
 included in it.


The committee would take a final view on whether natural gas
would be included in the GST after further deliberations, it said.

Finance Minister Pranab Mukherjee, present on the occasion,
made it clear that the discussion paper is by the states.


"These are the views of the empowered committee of state
finance ministers. We will also look into it," he said.

Mukherjee evaded a direct reply to a query on whether GST
would be introduced as scheduled. Some states like Madhya
Pradesh, Gujarat and Haryana have asked for a delay in the
 GST introduction.

 "So far as dates are concerned, we are working on it,"
Mukherjee said, when asked about whether GST would
be rolled out from April one, 2010.

 Doubts over the GST introduction has lingered for sometime
 now, and Haryana on Tuesday came out with an official
statement saying the Centre should defer the rollout by a year.

The state also asked for compensation for the loss of revenue
 of Rs 600 crore on account of the purchase tax levied on
foodgrains like wheat and paddy.

Gujarat has said that time available to introduce GST from
 the proposed date is not adquate and the time frame need to be recast.


The discussion paper suggests that among central taxes,
additional excise duty, additional customs duty, and special
 additional duty be replaced by the GST.

State taxes like entertainment tax, except for the one levied
by local bodies, luxury tax, taxes on lottery, entry tax except
octroi are proposed to be out once the new tax regime is introduced.

It proposed that exports from SEZs would not attract GST,
but sales from SEZ to domestic markets will draw the tax.

It also suggests that industrial incentives in the form of tax
 exemptions should be converted into cash refund schemes.

Insurance against Tax Liability in near Future

12 November 2009

In a bid to avoid unpleasant surprises, private equity players and
 companies are demanding covers against changing tax rules.
This has forced insurers in India to file for products like a tax
liability cover, along with warranty and indemnity covers.

insurance-2Insurers say the demand for such a cover shot up
 after the Vodafone tax case where the telecom major
was subjected to a capital gains tax of $2 billion for
 buying $11.2 billion worth shares of Hutchison.

“There is a huge demand from private equity players
 and companies going global. In another three-six months,
we expect to see these products in India,” said Marsh
Managing Director and country head Sanjay Kedia.

He expects deal sizes to be in the range of $4-150 million.

Since these will be mega-risk policies, they will be mostly
driven by reinsurance. In such cases, Indian insurance
companies place 10 per cent of the risk with the national
reinsurer, passing off the rest to international reinsurers.
The premium will vary from 1 per cent to 5 per cent of the sum assured.

“Underwriting risks arising from changes in the tax structure
of a particular country is not easy. We have to see if the
 insurance regulator allows these products,” said a senior
executive of a large private insurance company.

Outsourcing jobs arrive in India’s rural areas

November 13th, 2009

BAGEPALLI - Seventy percent of Indians live in rural areas like
 Bagepalli in Karnataka's Chikballapur district, and everyone
 knows that India has been struggling unsuccessfully with the
question of how to lift this vast underclass out of poverty.

While some economists argue that India still needs rapid
 urbanization if it is ever to become a major economic power,
the founders of Rural Shores, have taken the bull by the horns
 and set up outsourcing offices in rural areas, believing it makes
more sense to take jobs to where the people are.

The New York Times quotes said G. Srinivasan, the company's
director, as saying: "We thought, 'Why not take the jobs to the
 village? There is a lot of talent there, and we can train them to do the job."

Rural India has been often seen as a dead weight on the Indian
economy, a bastion of backwardness embodied by the frequent
suicides of farmers eking out livings from arid fields, dependent
 upon fickle monsoons, but now according to the NYT, Indian and
foreign companies have come to see India's backwaters as an
untapped market for relatively inexpensive goods like low-tech
cell phones, kitchen gadgets and cheap motorcycles.

Some businesses have begun looking to rural India for an
untapped pool of eager and motivated office workers.

For instance, Rural Shores has hired about 100 young people,
most of them high school graduates who have completed some
college, all of them from rural areas around this small town.
The company has three centres now, but it aims to open
 500 centres across India in the next five years.

Most of the center's employees are the first members of their
families to have office jobs. They speak halting English at best,
 but have enough skill with the language to do basic data entry,
read forms and even write simple e-mail messages, says the NYT.

With much lower rent and wages than other similar centers in
cities, the company says it can do the same jobs as many outsourcing
companies at half the price.

A Bangalore office worker with skills similar to those
of workers here commands about 7,000 rupees a month
(150 dollars), Srinivasan says.

In small towns and villages, a minimum-wage salary of
about 60 dollars a month is considered excellent.

Twenty-four-year-old R. Saicharan, a business school
graduate from Chennai, described the work that he
does as frenetic at best.

He says that he and other employees at Rural Shores
process 13,000 time sheets by 7 p.m. every day.

The time sheets belong to American truck drivers,
and Rural Shores has been hired as a subcontractor
for a larger outsourcing company in Bangalore to do
the data entry portion of the work.

The race is almost always on to earn bonuses for
being the fastest typist.

A majority of the workers are the children of farmers
and often the first generation to finish high school.
For many, a job at an outsourcing center is an
unimaginable opportunity, says NYT.

Jersey returns to India to promote finance industry

Mumbai, Nov 13 : A Jersey Finance delegation, is heading to India
later this month to build on the contacts established during previous
 visits and to promote the benefits of doing business with Jersey.

Jersey Finance is organising the visit and will host a range of formal
 meetings in both Mumbai and New Delhi, seeking to develop
growing governmental, regulatory and commercial ties with India.
Senator Philip Ozouf, Treasury Minister, and John Harris, Director
 General of the JFSC, will be among the delegation as well as many
leading Jersey practitioners.

During the five day visit, Jersey Finance will highlight the many
benefits Jersey has to offer and, in particular, attention will be
drawn to the recent series of international endorsements that
 Jersey has received from bodies such as the OECD and IMF
regarding its high standards of regulation and assessment as
a leading cooperative and transparent international finance centre.

A number of leading finance professionals from Jersey will present
a series of subjects including: how the new Foundations Law
is attractive to high net worth families and non-resident Indians;
how the use of Jersey investment vehicles can assist both with inward
 investment and with Indian businesses seeking to expand internationally;
and how Jersey’s expertise, regulatory and legal framework can support
 international investors seeking to buy overseas property,
particularly in London.

Geoff Cook, Chief Executive, Jersey Finance commented:
 “I am delighted that we have representatives from Jersey’s
 Government and the financial services regulator, alongside
 many finance professionals from Jersey keen to develop their
business links with colleagues in India. The formal presentations
provide us with an opportunity to meet and network with a diverse
 range of industry leaders and senior practitioners.

We intend to advise on the recent independent endorsement
Jersey has obtained regarding the high standards of our
regulatory regime and offer a technical summary of the
 jurisdiction’s breadth of expertise and how this is relevant
to the Indian market.”

In addition to the presentations and receptions, there will be
meetings between Government officials, regulators and
important trade organisations. Members of the delegation
will also explore trading opportunities and regulatory co-operation
and alignment with the Indian Government and regulatory officials.

There will be an opportunity to progress business opportunities
 in one-to-one meetings between Jersey representatives and
Indian business leaders and private clients.

YES BANK Empanelled by as the Clearing and Settlement Bank by Bombay Stock Exchange

YES BANK has been a clearing and settlement banker to various leading
 Commodity Exchanges in India, and has managed Settlement Banking
activities for several exchange members. YES BANK has established a
‘Truly Integrated’ model leveraging the ‘state-of-art’ technology platforms
to cater to the time-sensitive requirements of Equity and Commodity Markets’ clients.


Speaking on the occasion Mr. Rana Kapoor,
Founder/Managing Director & CEO, YES BANK, said:
“YES BANK is recognized for implementing innovative and
customized solutions for its corporate and retail clients.
It is our privilege to have been empanelled by BSE.
This alliance is a significant milestone for YES BANK
which will enable us to further strengthen its Capital
Markets business proposition to the members of BSE,
through our fully Integrated and proven technology platform.”


Mr. Madhu Kannan, Managing Director & CEO, Bombay Stock Exchange, said:


“We welcome YES BANK as clearing bank to the BSE fold. BSE is
continuously working towards enhancing the technology and
provide more innovative products and services to its members.
With this new arrangement, we hope to leverage YES BANK’s
expertise in technology and attract more customers of the Bank
to trade through BSE.”

Sunbeam's Chief Tells How He Kept Afloat Amid Crisis

By JOANN S. LUBLIN


Jerry W. Levin never expected to run Sunbeam for long. Instead,
his temporary CEO gig has turned into a four-year pressure cooker
 full of seven-day weeks and sleepless nights.

The 58-year-old executive took command of the Boca Raton, Fla.,
consumer-products maker in June 1998 after it fired his predecessor,
Albert J. Dunlap. Mr. Levin is a veteran lieutenant of billionaire
financier Ronald O. Perelman, who became a major shareholder after
Sunbeam bought his controlling stake in Coleman, a camping-goods company.

Lessons in Leadership


Under Mr. Levin's command, Sunbeam uncovered massive accounting fraud,
 restated 18 months of earnings and filed for Chapter 11 bankruptcy protection.
The company survived -- and may soon emerge from bankruptcy proceedings.
 A U.S. Bankruptcy Court judge in New York is set to hold a confirmation
hearing Nov. 20 on Sunbeam's amended reorganization plan.
If approved, Mr. Levin would remain chairman and CEO.

How can you minimize stress and potential career damage
 when you manage a major corporate crisis? It's an increasingly
 common problem for top executives nowadays.
Mr. Levin shared his insights during a recent interview
at Sunbeam's New York office. Excerpts follow:

WALL STREET JOURNAL: It's taking longer to emerge from bankruptcy
than the six to nine months you predicted when Sunbeam filed early
 last year. Why?

Mr. Levin: We really did not anticipate the magnitude or the duration
of the downturn. In 2001, as in 2000, we missed our income forecasts.
 In 2002, the economy stopped hurting us.

WSJ: How hard has it been to negotiate with Sunbeam's
creditors during the bankruptcy?

Mr. Levin: It is a very different environment than I have ever faced before.

When you get in a room of people involved in this Chapter 11 process,
nobody trusts each other. The aggravating part is when it starts getting
 personal. I am constantly questioned about things. I am learning to
live with it. I can't say I like it.

That lack of trust makes it painfully slow and difficult to work through
problems. Things I can do in a day outside of Chapter 11 will take me
a month inside Chapter 11. It requires an incredible amount of patience
and understanding.

When I get really aggravated with the creditors, I sit back and say:
"OK, you know they are a bank. All they want is their money back."
 From that perspective, what they are asking makes sense.
It is not what I want. I want to grow the company.

Our lenders have learned I will tell them exactly how it is.
I expect my employees to do the same thing. Tell me everything
 that is on their minds. We have a policy here:
Sucking up to the CEO is a really dumb thing to do. If somebody
 sees somebody trying to appease me or make me happy,
they start laughing. They pick on the individual. It could go on for months.

There is not a soul here in senior management who isn't
afraid to call me an idiot on any particular issue.

WSJ: How do you handle the personal pressures of leading a troubled company?

Mr. Levin: I just don't get stressed out. In the beginning,
we were hit from every conceivable direction.
 Every government agency decided they might as well investigate us.

Staying healthy is a challenge. I need to be fit for this
because the hours are long and you are juggling so
many balls at once. Don't skip your exercise because
 you have a meeting.

Every morning, I get up and do a series of sit-ups,
stretching. I work out with dumbbells, a lightweight workout.
 I try to mix that with running two or three times a week for
two to three miles a day. Not very fast miles.

When I get away, I hike. We have a place in Tucson where
 mountain hiking is pretty rigorous.

WSJ: Many executives with the toughest jobs feel they must
work hard constantly.

Mr. Levin: You won't be able to. The last thing you need to do
 is develop a heart condition and high blood pressure.
I watch my blood pressure all the time. It doesn't go up.

WSJ: Even after a creditors' meeting?

Mr. Levin: Then, a little bit. But it will go right back down.

WSJ: Did you have trouble sleeping during your initial months
at Sunbeam when you worked virtually nonstop?

Mr. Levin: I had so many things going on, it was really difficult
to turn them off and go to sleep. I found myself glazing over
during long meetings. It was embarrassing. I would look up
and everybody was staring at me [and] laughing at me for
 falling asleep in the meetings.

I went back to drinking coffee in the afternoon.
It solved the problem.

WSJ: Why have you stuck with this CEO job for so long?

Mr. Levin: There are days where I ask myself that same question.
 But by and large, everyone has really done a lot to help
Sunbeam through all this. It doesn't seem fair just to walk away.
 We are so close to victory that I am absolutely going to see it through.

Wipro buys part of Yardley retail business for $45 mn

Bangalore, Nov 5 (IANS) Wipro Consumer Care and Lighting,
the FMCG arm of the IT bellwether, Thursday announced the
acquisition of Yardley personal care business in Asia, Middle
East, Australasia and some African markets from the British
based Lornamead group for $45.5 million (Rs. 214 crore).

‘The acquisition of Yardley business is on run-rate
basis of $24 million for this fiscal (FY 2010),’ the
company said in a regulatory filing.

The transaction is expected to be completed by
 mid-December.

Lornamead, which bought Yardley from Procter & Gamble
 in 2005, will retain Yardley business in Europe and Americas.

The 239-year-old Yardley is a strong heritage global brand
 in the personal care with fragrance products, bath and
shower products and skin care.

‘The brand has a strong equity globally in markets, including
Asia, Middle East, Australasia and Africa,’ the company said
in a statement later.

IMF says it got 'good price' for gold from India

        |    
WASHINGTON: The International Monetary Fund, which
sold 200 tonnes of gold for about $6.7 billion to the
 Reserve Bank of India, on Wednesday said
it got a "good price," and wants to be similarly
"lucky" in the next phase sale of the precious metal.

The sale price of gold to the RBI is expected to be
under $1,045 per ounce, nearly $200 per ounce
higher than what it would have been anticipated
in mid-September, a senior IMF official told
reporters in a teleconference.

When the IMF Executive Board at its meeting on
 September 18 announced to sell 403.3 tonnes of gold
-- one-eighth of the Fund's total holding --
the prevailing market price of the bullion at that
 time was about $850 an ounce.

"Obviously, it's a good price relative to the original
 assumptions," the IMF official said.

The IMF, in pursuance of the decisions taken at the
 G-20 summit in London, had decided to sell about
403.3 tonnes of gold to shore up its finances so that
 it can lend money to the poor countries at concessional rates.

"Of course, this is only half the sale that we
 have completed, so we don't want to get ahead
 of ourselves. We still have another half to go.
I hope we'll still be lucky," he said.

The official said the good price received for its
gold from India would certainly help the multilateral
lending agency to meet its target of stepping up
 financing to poor countries.

RBI buys 200 mt gold from IMF to pump up reserves' value

MUMBAI: The purchase of 200 tonnes of gold from
 the International Monetary Fund (IMF) by the Reserve
Bank of India will not just diversify the
country’s foreign exchange reserves but also boost
of the value of the reserves.

On Tuesday, RBI announced that it had concluded
the purchase of 200 metric tonne of gold from the
International Monetary Fund (IMF), under the Fund’s
 limited gold sales programme. The central bank said
 that it was an official sector off-market transaction
and was executed over a two-week period during
October 19-30, 2009 at market-based prices.

Gold prices have been moving up faster than the majo
r global currencies — which is expected to boost the
value of the country’s foreign exchange reserves.

This is the first time that the Reserve Bank has bought
 such a large amount of gold globally. Interestingly,
the market import of gold has dipped sharply this year
on account of high international prices and low demand.
 Years ago, confiscated smuggled gold used to be assigned to RBI vaults.

However, with the opening up of the economy,
gold smuggling has virtually stopped. For many
year’s the central bank gold holdings remained
constant at about 11.5 million troy ounce accounting
 for 4% its reserves worth $285 billion now.

The recent purchase of close to 6.5 million troy ounce
would raise the share of gold in India’s foreign exchange
 reserves to about 6%. The gold is valued at the month end
closing price on the London bullion exchange.

With international gold prices touching a new high every
day, this part of the reserves has seen a sharp appreciation.
In the month of September, reserves rose $485 million only
on account of the rise in valuation of gold in reserves.

In its official release, IMF has said that the total sales
proceeds are equivalent to US$ 6.7 billion or SDR 4.2 billion.
MD Dominique Strauss-Kahn indicated that the proceeds from
 the gold sale will help the Fund, step up much-needed
concessional lending to the poorest countries.

As for the central bank, there is no official communication
 either being the intent of such a move or its plans for the
purchased gold. But experts say the move could help the
 central bank diversify its reserves and would not have
a significant impact on the overall foreign exchange
 reserves position, said a former top RBI official.

This is because these purchases are reckoned to be
 carried out from the $4.8 billion worth SDR allocation
that the RBI had obtained from the Fund earlier this year.
The IMF had allocated $4.8 billion by way of general
allocation of special drawing rights (SDR) — the reserve
currency with the IMF — in August this year as part of its
SDR 161.2 billion package allocated to member countries.

The value of SDR is a weighted average of a basket of
 currencies which includes the US dollar,
the Sterling pound, the yen and the euro.
The weightage to each currency which is revised
 at regular intervals depends on their prevailing
relative importance in the global markets.

Land disputes is costing India 100 Billion Dollars of Investment !

by Arun Prabhudesai


We very well know the story of Tata Nano Land Dispute.
What was West Bengal’s loss though was Gujarat’s profit.
 Nano’s are now coming out of the state.


However, most of the projects are not as lucky as Nano
to get a Land replacement. Did you know that 70% of total
 190 projects that were supposed to be implemented have
been stalled due to Land acquisition related disputes.
The ECO Pulse study by ASSOCHAM has revealed this
 startling fact.

Most of these projects are basically International companies
needing to set their shop in India.

For e.g: 22 major steel projects in the country worth
USD 82 billion are being held up because of procedural
 delays in obtaining environmental impact assessment
clearance and delays in land acquisition mainly due
 to public protests. One such project – Arcelor Mittal
which nearly pulled out of building 2 steel plants that
 would pump close to USD 20 billion.
The reason – They were unable to acquire land
 in Jharkhand and Orissa.

The study also revealed that, there are currently
18 strangled projects of India Inc to the tune
 of Rs.244,815.5 crore (Rs.2.45 trillion) remained
 on papers, in the form of memorandum of
understanding (MoU) and agreements over
the past three-four years.

If at all these projects had been implemented,
 it would have created Jobs for 164,000 people
directly and 270,000 people indirectly !

Although, I do understand that it is important for
farmers to safeguard their lands – But the
compensation offerings are very much in line
with Market & Real Estate conditions.
 I am not pointing here that Farmers should get a
 raw deal – Its their land, they have right to
 decide what to do with their lands.

What I do not understand here is why is
government not intervening.
 This is a win-win situation.
If Indian Government takes these
 projects seriously, I am sure there
 are plenty of solutions available
to overcome these Land disputes.

What is your take?

SPECIAL COURT FOR "SATYAM CASE TRAIL" G.O. NO. 100

By : PJANARDHANA REDDY
 

The Andhra Pradesh government on 3rd Nov ’09 issued G.O NO. 100 for
 setting up a special court of Additional Chief Metropolitan Magistrate
to try the case of multi-crore rupee scam in Satyam Computer Service


The state Cabinet, at its meeting on October 29, approved
the setting up of a special court based on the request of the
Central Bureau of Investigation (CBI) and the recommendation
 of the high court to ensure a speedy trial of the Satyam case.

Accordingly, state Legislative Affairs and Justice Department
secretary R Ramachandra Reddy issued an order today for
setting up the special court.

Required staff for the special court and expenditure would
be Rs.31.60 laks/year the order stated.

In January, Satyam founder B Ramalinga Raju admitted to
cooking up the company's account books for several years,
revealing one of the biggest scams in the Indian corporate history.

The CBI, which took over the investigations into the Satyam
scandal in February, filed the chargesheet against Ramalinga
Raju and others in the 14th additional chief metropolitan
magistrate court. Besides CBI, SFIO and SEBI were also
investigating the Satyam fraud.

The CBI had written a letter to the AP government and the
AP High Court requesting that a special court be established
to try to the Satyam case.

India Investigates Former CM Who Stashed Money In Malaysia

November 02, 2009 16:28 PM


By P. Vijian

NEW DELHI, -- A former chief minister is under probe by the Indian
Income Tax Department for siphoning money from the country and
 stashing it in Malaysia and other foreign banks,

through the
 age-old Mumbai-based 'hawala' operators.

The 'hawala' system pertains to the transfer of money through
 a network of brokers.

"We have seized documents relating to investments and money sent to Dubai,
Thailand, Malaysia and other foreign countries," Ujjwalkumar Chaudhary,
investigating officer with the tax office, the Pioneer newspaper reported
him as telling the media.

The 38-year-old suspect, who was a former chief minister of Jharkhand,
is under scrutiny for multi-million corruption while he was in power --
largely for stashing black money to the tune of US$100 million
(RM350 million) in overseas banks -- using the age-old hawala
 system (transfer of money through a network of brokers).

Another charge slapped against the politician was the procurement
of mines in Liberia, under the name of his close associates, worth
nearly US$1.7 million (RM5 million), while he was the state's mines
 and geology minister between 2003-2006, added the paper.

The former chief minister -- currently an independent member
of parliament in his native village -- is being investigated under
 the Prevention of Money Laundering Act.

The suspect was a son of a labourer from a remote village in Jharkhand,
 and had also worked as a labourer before embracing politics.

During the ongoing investigation last Saturday, tax officers raided
70 premises, mostly linked to the politician, in eight Indian cities.

There, sleuths unearthed voluminous documents relating to bank
 transactions and seized computer peripherals.

According to preliminary investigations,

the politician had investments
worth nearly US$300 million (RM1 billion) 

in local companies, as well.

His corrupt activities were exposed after the state government began to
investigate the politician since last month, for amassing wealth,
which was disproportionate to his known source of income.

RBI asks Banks to Higher Provision For NPAs

28-10-09

New Delhi: The Reserve Bank’s decision to ask banks to keep
higher provisioning for non-performing assets means that banks
now have to make an additional
provisioning of Rs 13,000 crore
till September end next year, rating agency Crisil said.

“Crisil estimates that the proposed
minimum coverage for
NPAs will mean that banks now
have to make an additional
provisioning of Rs 130 billion
till end-September 2010,”
the rating agency said in a release.

Its estimate is based on the NPAs reported by banks
as on March 31, 2009.

The NPAs were at 2.3 per cent of
system advances, while the NPA coverage was
around 55 per cent as on that date.

Yesterday, in its quarterly policy review,
Reserve Bank has asked banks
to ensure that their provision coverage
ratio reaches 70 per cent
by September end 2010.

Provision coverage ratio
is the percentage of loan
that a bank would lose if it
has to write off that account.

Crisil said that the measure will
enhance the resilience
of the banking system to absorb loan losses.

However, it will also lead to a decline in the sectors
profitability over the near term.

The measure should also increase
the consistency in banks
provisioning for NPAs and facilitate
a more meaningful
comparison of their profits, the rating agency said.

Posted by DRT - India at 2:06 PM

Doing Business in India is even tougher than in Pakistan, SriLanka or Nepal

by Sriram Vadlamani

Now that does not sound very positive, is it?

India touted as the next world super power is

unfriendly to entrepreneurs who want to setup

shop in India, so much so that war ravaged,

terrorism prone, unsettled political economy

like Pakistan ranks much above India.


Doing business in India is tough…really tough !

World Bank has released the latest rankings

for 2009 for doing business in several countries

. India not surprisingly is languishing at a

ranking of 122. This is a slip of 2 ranks from 2007.

That should not come as a surprise because it has

been a while since India has gone through any major

reforms. Other intriguing facts are all our neighbors

(including Pakistan) of the sub-continent have done

remarkably well. Sri Lanka has led the way in the

sub-continent with some major reforms.

This report is extremely important because

, FDI’s and private equity groups follow it carefully

to park their investments.


The main reason for India slipping is because

most of the African nations have gone through

major reforms and thus broke through the rankings.

India did not focus on any reforms since the repor

t was published in 2008. Other factors for India’s

downslide are the number of tax payments required

by the companies and the inefficiency of court system

to resolve any legal matters.

impact on banks' profits over the short term

Mumbai: Tighter provisioning norms announced by the Reserve
Bank in its policy review last week could have a significant
impact on banks' profits over the short term, Moody's said
in a note on Monday.

Banks with a low provision cover ratio combined with
low core Tier 1 capital could face a downward
rating pressure, it added.

The Reserve Bank of India (RBI) tightened banks' provisioning
requirements, increasing them to 1 percent from 0.4 percent for
loans related to commercial real-estate classified as standard.

The RBI also set up a minimum of 70 for the banks'
non-performing loans (NPL) provision cover ratios to
be met by September 2010.

Moody's said these measures suggest that the RBI is worried
about a potential increase in bad loans, particularly given the
significant build-up of restructured loans and in view of the large
increase in credit to the commercial real estate sector
over the last year.

While these measures will increase banks' buffer to absorb
eventual loan losses, higher credit costs could dent their
bottom lines, it said.

In some cases where this ratio is currently around or even less
than 50 percent, the short-term impact on profits could be
significant, as there is less than a year to comply with the
70 percent requirement, it added.

The Reserve Bank of India will soon issue guidelines on
meeting provisioning rules and some banks have sought
time to meet them,
its deputy governor Shyamala Gopinath said on Friday.

Moody's also said in the note that the Reserve Bank's
decision to keep its key rates unchanged at the policy
review and a hike in the proportion of deposits banks have
to invest in approved government securities will have no
short-term credit implications for banks.

India sees Pakistani hand in fake note flood

By Rupam Jain Nair (AFP)

NEW DELHI — When India's central bank

admitted discovering 400,000 fake notes

in its currency reserves,

many here woke up to the scale of the

country's counterfeit money problems.

Worse still, the embarrassing admission related

to a survey from the last financial year to March 2009

and authorities say the problem has since got worse.

Police and the central bank have observed a tripling

in the value of notes detected or seized in raids in recent

years and authorities are convinced the source of the

deluge is a familiar foe across the border: Pakistan.

"We have had some success in

tracking the routes and will

continue to counter it, but behind

this racket is an organised

effort in Pakistan and PoK

(Pakistan-administered Kashmir),"

Home Minister P. Chidamabaram said recently.

"It's not just a cottage industry."

Hardly a day passes without news of arrests

of currency smugglers, but police say they are

only catching the small-fry racketeers while the

big fish printers act with impunity over the border.

Many locals here complain of withdrawing fake notes

from bank machines and ever-vigilant shopkeepers

routinely check the water marks that are meant

to protect the larger denomination 500 and 1,000-rupee notes.

A report this year by

the Directorate of Revenue Intelligence (DRI),

a state body that tracks money flows,

said counterfeit currency was brought in

by militants from abroad and then moved

through criminal networks.

The DRI said that 130 million high-quality

counterfeit notes were being smuggled

into India every year and only a fraction were detected.

The security establishment is now clamouring

for more scrutiny of India's banking system

and the central bank, the Reserve Bank of India (RBI),

has instructed nationalised banks

to install sorting machines to weed out fakes.

"If the circulation of counterfeit notes was

not checked then the economy could be

running with over 25 percent fake notes

making the rounds across the country,"

analyst Ajai Sahni, executive director

of the Institute for Conflict Managment.

The RBI is also running awareness campaigns,

even educating schoolchildren to detect fake notes,

and plans to introduce a billion special plastic-coated

notes that are tougher to counterfeit.

Federal police say intelligence gleaned from

arrested suspects suggests the existence of

sophisticated printing presses in Pakistan under

the control of the Inter Services Intelligence agency.

"The ISI prints them in Pakistan, supplies them to

agents in Nepal and Bangladesh, who identify

Indians willing to take the risk of circulating

fake notes," said Sahni.

The quality of the fakes varies from

amateurish to extremely sophisticated.

"You cannot expect a local bank clerk to detect

sophisticated fakes," an intelligence officer told AFP,

asking not to be named.

Police and other agencies seized six million

dollars in fake notes in 2008, nearly triple

the amount seized in 2007 and a majority

of the counterfeit notes were the

500-rupee bill (10 dollars), police figures show.

The RBI said in its last report that the value

of counterfeit notes detected in the banking

channels was over three million dollars in 2008-09,

triple the amount detected in 2007-08.

Some fear that if fake currency continues to increase

at this rate, it will damage the economy.

Economists suggest consumers' trust in

the rupee could be undermined, while

at the central bank complain that fake currency

complicates their deliberations about interest rates.

"The rising trend of fake notes in the market poses

a threat to the economy. Policies, inflation are based

on monetary calculations -- all of which can go wrong

due to fakes," said a policymaker

at the RBI who declined to be named.

K.P. Singh, a police officer in the central

state of Madhya Pradesh who netted

a huge haul in September of 4,000

high-denomination notes was pessimistic

about the possibility of stemming the flow.

"We are arresting the dealers and petty

smugglers operating in India but the

kingpins are based in Pakistan," he told AFP.

"It is in Pakistan the problem

begins and can only be ended there."