1.Centre to ease path for monetisation

Finance Minister to chair meet with regulators to relax investment norms

Union Finance Minister Nirmala Sitharaman will soon chair a meeting of the Financial Stability and Development Council (FSDC) to nudge financial regulators to relax and harmonise investment norms for instruments such as Infrastructure Investment Trusts (InvITs) to be used to monetise public assets such as highways, gas pipelines and railway tracks.

The meeting of the council entrusted with enhancing coordination among financial sector regulators — RBI, SEBI, IRDA and PFRDA — assumes significance after the government unveiled the National Monetisation Pipeline (NMP), listing assets across sectors that are to be monetised for an estimated ₹5.96 lakh crore over four years.

With the economy still not out of the woods from the COVID-19 pandemic, and Ms. Sitharaman urging industry to look beyond banks and tap the markets for their financing needs, steps to ease access and encourage investments in the corporate bond market are also expected to be discussed by the FSDC.

“An FSDC meeting has been planned for some time, and it will be convened very soon,” a top Finance Ministry official said.

Financial Stability and Development Council

• Establishment:
  • The Financial Stability and Development Council (FSDC) is a non-statutory apex council under the Ministry of Finance constituted by the Executive Order in 2010.
  • The Raghuram Rajan committee (2008) on financial sector reforms first proposed the creation of FSDC.
• Composition:
  • It is chaired by the Finance Minister and its members include the heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA), Finance Secretary, Secretary of Department of Economic Affairs (DEA), Secretary of Department of Financial Services (DFS), and Chief Economic Adviser.
    • In 2018, the government reconstituted FSDC to include the Minister of State responsible for the Department of Economic Affairs (DEA), Secretary of Department of Electronics and Information Technology, Chairperson of the Insolvency and Bankruptcy Board of India (IBBI) and the Revenue Secretary.
  • FSDC sub-committee is headed by the Governor of RBI.
  • The Council can invite experts to its meeting if required.
• Functions:
  • The objective of FSDC is to strengthen and institutionalize the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development.
  • It also intends to monitor macro-prudential supervision of the economy. It will assess the functioning of the large financial conglomerates.

2.Asset monetisation — execution is the key

The Government’s plan needs an Asset Monetisation Monitoring Authority to evaluate the execution

The Government has announced an ambitious programme of asset monetisation. It hopes to earn ₹6 trillion in revenues over a four-year period. At a time when the Government’s finances are in bad shape, that is money the Government can certainly use. Getting asset monetisation right is quite a challenge, though.

In asset monetisation, the Government parts with its assets — such as roads, coal mines — for a specified period of time in exchange for a lump sum payment. At the end of the period, the assets return to the Government. Unlike in privatisation, no sale of government assets is involved.

By monetising assets it has already built, the Government can earn revenues to build more infrastructure. Asset monetisation will happen mainly in three sectors: roads, railways and power. Other assets to be monetised include: airports, ports, telecom, stadiums and power transmission.

First, under-utilised assets

Two important statements have been made about the asset monetisation programme. One, the focus will be on under-utilised assets. Two, monetisation will happen through public-private partnerships (PPP) and Investment Trusts. Let us examine each of these in turn.

Suppose a port or airport or stadium or even an empty piece of land is not being used adequately because it has not been properly developed or marketed well enough. A private party may judge that it can put the assets to better use. It will pay the Government a price equal to the present value of cash flows at the current level of utilisation.

By making the necessary investment, the private player can reap the benefits of a higher level of cash flows. The difference in cash flows under Government and those under private management is a measure of the improvement in efficiency of the assets. This is a win-win situation for the Government and the private player. The Government gets a ‘fair’ value for its assets. The private player gets its return on investment. The economy benefits from an increase in efficiency. Monetising under-utilised assets thus has much to commend it.

Those well utilised

Matters could be very different in monetisation of an asset that is being properly utilised, say, a highway that has good traffic. In this case, the private player has little incentive to invest and improve efficiency. It simply needs to operate the assets as they are.

The private player may value the cash flows assuming a normal rate of growth of traffic. It will pay the Government a price that is the present value of cash flows minus its own return. The Government earns badly needed revenues but these could be less than what it might earn if it continued to operate the assets itself. There is no improvement in efficiency.

Suppose the private player does plan to improve efficiency in a well-utilised asset by making the necessary investment and reducing operating costs. The reduction in operating costs need not translate into a higher price for the asset than under government ownership. The cost of capital for a private player is higher than for a public authority. A public authority needs less equity capital and can access debt more cheaply than a private player. The higher cost of capital for the private player could offset the benefit of any reduction in operating costs.

As we have seen, the benefits to the economy are likely to be greater where under-utilised assets are monetised. However, private players will prefer well-utilised assets to assets that are under-utilised. That is because, in the former, cash flows and returns are more certain. Private incentives in asset monetisation may not accord with the public interest.

Valuation and issues

There are other complications. It is very difficult to get the valuation right over a long-term horizon, say, 30 years. Does anybody know what would be the growth rate of the economy over such a period? For a road or highway, growth in traffic would also depend on factors other than the growth of the economy, such as the level of economic activity in the area, the prices of fuel and vehicles, alternative modes of transport and their relative prices, etc. If the rate of growth of traffic turns out to be higher than assessed by the Government in valuing the asset, the private operator will reap windfall gains.

Alternatively, if the winning bidder pays what turns out to be a steep price for the asset, it will raise the toll price steeply. The consumer ends up bearing the cost. If transporters have to pay more, the economy suffers. There is also the possibility that roads whose usage is currently free are put up for monetisation. Again, the consumer and the economy bear the cost. It could be argued that a competitive auction process will address these issues and fetch the Government the right price while yielding efficiency gains. But that assumes, among other things, that there will be a large number of bidders for the many assets that will be monetised.

Lastly, there is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation. The life of the asset, when it is returned to the Government, may not be long. In that event, asset monetisation virtually amounts to sale. Monetisation through the PPP route is thus fraught with problems.

Another way of going about it

The other form of monetisation the Government has indicated is creating Infrastructure Investment Trusts (InvIT) to which monetisable assets will be transferred. InvITs are mutual fund-like vehicles in which investors can subscribe to units that give dividends. The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued. InvITs offer a portfolio of assets, so investors get the benefit of diversification.

Assets can be transferred at the construction stage or after they have started earning revenues. In the InvIT route to monetisation, the public authority continues to own the rights to a significant portion of the cash flows and to operate the assets. So, the issues that arise with transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.

The pathway

What conclusions can we draw from the above? First, a public authority has inherent advantages on the funding side. In general, the economy is best served when public authorities develop infrastructure and monetise these. Second, monetisation through InvITs is likely to prove less of a problem than the PPP route. Third, we are better off monetising under-utilised assets than assets that are well utilised. Fourth, to ensure proper execution, there is a case for independent monitoring of the process. The Government may set up an Asset Monetisation Monitoring Authority staffed by competent professionals. The authority must put all aspects of monetisation under the scanner — valuation, the impact on price charged to the consumer, monetisation of under-utilised versus well-utilised assets, the experience across different sectors, etc. — and document the lessons learnt.

3.Indian astrophysicists spot rare merger of three jumbo black holes

The team was observing the merging of two galaxies — NGC7733 and NGC7734 — when they detected unusual emissions from the centre of the latter

A rare merging of three supermassive black holes has been spotted by a team of astrophysicists from the Indian Institute of Astrophysics (IIA), working with Professor Francoise Combes from the Paris Observatory. This is only the third time such an event has been observed and the findings were published as a letter in the journal Astronomy and Astrophysics in June.

The team were observing the merging of two galaxies — NGC7733 and NGC7734 — in the earth’s celestial neighbourhood when they detected unusual emissions from the centre of the latter and a curious movement of a large bright clump within it, having a different velocity than that of NGC7733. Inferring that this was a separate galaxy, the scientists named it NGC7733N.

All three merging black holes were part of galaxies in the Toucan constellation. They are quite far away given that the earth’s nearest galactic neighbour — the Andromeda galaxy — is 2.5 million light years away. Yet the paper describes these as nearby galaxies.

“In astronomy everything is relative. When we study the solar system, we say Mercury is closer and Jupiter is far… Compared to our nearest neighbour Andromeda galaxy, the galaxies NGC7733, 7734 and 7733 N are quite far away, but compared to the size of universe, they are nearby galaxies,” explains Jyoti Yadav, a Ph.D. student at the IIA and the first author of the paper.

In an email to The Hindu, Mousumi Das, also from the IIA and another author of the paper along with Sudhanshu Barway, says the team were studying the active galactic nuclei in the two massive barred spiral galaxies NGC7733 and NGC7734 and that the detection of the third was surprising. “It was a bit like buy two and get one free,” says Dr. Das. “The PI of the project confirmed our suspicions using spectroscopic data from a European telescope called MUSE in Chile.”

The group observed these galaxies with a near infrared telescope in South Africa. “Then, later on, because they appeared interesting, we also observed them with the UVIT [onboard the first Indian space observatory ASTROSAT],” says Dr. Das. “We also found optical data in the MUSE archive. So, we did not have to do the optical spectroscopy.”

Final parsec

In a press release, the team explains that if two galaxies collide, their black holes will also come closer by transferring the kinetic energy to the surrounding gas.

The distance between the black holes decreases with time until the separation is around one parsec (3.26 light-years).

The two black holes, however, are then unable to lose any further kinetic energy to get even closer and merge. This is known as the final parsec problem.

But the presence of a third black hole can solve this problem.

“The two can come closer when another black hole or a star passes by and takes away some of their combined angular momentum,” explains Dr. Das.

Thus, the dual merging black holes merge with each other in the presence of a third.

Many Active Galactic Nuclei (AGN), or supermassive black hole at the centre of a galaxy, pairs have been detected in the past, but triple AGN are extremely rare, and only a handful have been detected before using X-ray observations.

“Multiple accreting black holes [AGN] may be more common in our universe and especially common in galaxy groups. So the growth of black holes may be driven by such mergers in groups,” says Dr. Das.

The study used data from the Ultraviolet Imaging Telescope (UVIT) on board the first Indian space observatory ASTROSAT, the European integral field optical telescope called MUSE mounted on the Very Large Telescope (VLT) in Chile and infrared images from the optical telescope (IRSF) in South Africa.

Why in News

Recently, the Department of Science and Technology reported that Indian scientists have discovered the merger of three supermassive black holes from as many galaxies to form a triple Active Galactic Nucleus.

• Many Active Galactic Nuclei (AGN) pairs have been detected in the past, but triple AGN are extremely rare, and only a handful has been detected before using X-ray observations.

Key Points

• Current Merger:
  • Scientists were studying the AGN in the two massive barred spiral galaxies NGC7733 and NGC7734 when they detected unusual emissions from the centre of the latter and a curious movement of a large bright clump within it, having a different velocity than that of NGC7733.
    • As the third one was a separate galaxy, the scientists named it NGC7733N.
  • All three merging black holes were part of galaxies in the Toucan constellation.
    • Toucan Constellation: It is located in the southern hemisphere of the sky. It is visible at latitudes south of 15 degrees between August and October. It is completely below the horizon for anyone north of 30 degrees. It is a small constellation, occupying an area of 295 square degrees. This ranks it 48^th in size among the 88 constellations in the night sky.
  • They are quite far away when compared to the nearest galactic neighbour – the Andromeda galaxy is 2.5 million light years away.
• Active Galactic Nuclei:
  • There are supermassive blackholes, which are several million solar masses in size, at the centres of galaxies, and these are known as AGN.
  • At the center of most galaxies, there’s a massive black hole with a huge mass accumulating gas, dust, and stellar debris around it. AGN is formed when the gravitational energy of these materials, being pulled towards the black hole, is converted into light.
    • Since they “accrete“ matter, they often have a glow around them which can be observed using light spectroscopy.
• Collision of Galaxies:
  • If two galaxies collide, their black hole will also come closer by transferring the kinetic energy to the surrounding gas.
  • The distance between the blackholes decreases with time until the separation is around a parsec (3.26 light-years).
  • The two black holes are then unable to lose any further kinetic energy to get even closer and merge. This is known as the final parsec problem.
• Significance of the Finding:
  • The presence of a third black hole can solve the final parsec problem. The two galaxies can come closer when another black hole or a star passes by and takes away some of their combined angular momentum.
  • The finding shows that multiple accreting black holes [AGN] may be more common in our universe and especially common in galaxy groups. So the growth of black holes may be driven by such mergers in groups.

Black Hole

• It refers to a point in space where the matter is so compressed as to create a gravity field from which even light cannot escape.
• The concept was theorized by Albert Einstein in 1915 and the term ‘black hole’ was coined in the mid-1960s by American physicist John Archibald Wheeler.
• Usually, the black holes belong to two categories:
  • One category ranges between a few solar masses and tens of solar masses. These are thought to form when massive stars die.
  • The other category is of supermassive black holes. These range from hundreds of thousands to billions of times that of the sun from the Solar system to which Earth belongs.
• In April 2019, the scientists at the Event Horizon Telescope Project released the first-ever image of a Black Hole (more precisely, of its shadow).
• Gravitational Waves are created when two black holes orbit each other and merge.