S&P launches India specific Index for global investors

Though India’s stock markets have been underperforming in recent months but, the Sensex as well as the Nifty has given more than 40% annualized returns in the past five years to 2007. Similarly, since 1998, net foreign investment into India has quadrupled. Gauging by the above parameters, the country continues to be one of the most attractive markets in the world. To give global investors better and comprehensive information to make investments decision in India, global rating major Standard & Poor has launched S&P India Select Index. The index will give global investor with tradable exposure information and exposure to the largest and most liquid companies listed on the National Stock Exchange (NSE).

The index includes 60 major Indian companies that meet its parameters which includes size, liquidity and tradability requirements. Also, there is no single stock representing a weight of more than 10% in the index. On a whole the index is float-adjusted and stock weights are determined by what is legally and practically available to foreign investors.

Telecommunications, consumer staples, utilities, financials, energy, materials, industrials, information technology and healthcare are among the sectors included in the index. The top ten holdings by percentage of index weight are Infosys, Bharti Airtel, ONGC, Reliance Communications, HDFC, RIL, ICICI Bank, HUL, BHEL, and L&T. For inclusion in the index, the companies must already be a constituent of the S&P/IFCI India Index with a float-adjusted market capitalization above $500 mn at each annual rebalancing and a six-month average daily trading value above $1 mn. The index uses an evolutionary algorithm-driven optimization to maximize index basket liquidity at each rebalancing which occurs annually in January.

This is the third such move in the past one year by global financial companies to launch indices based on India, last August, Dow Jones had launched Dow Jones India Titans, a stock index tracking 30 most liquid stocks on the BSE and the NSE, while in February, finance firm Atherstone Capital Markets launched two indices dedicated to Indian primary markets.

Automotive Engineering Offshore activity gaining ground in India

India is steadily gaining ground in almost all kind of outsourcing and offshoring services. Automotive engineering offshore activity is also gaining ground. Currently automotive offshoring has been a small component of engineering offshoring activity in India. As per one of the estimation global engineering offshoring activity amounts to $10-15 bn and India accounts for just around 12% of this market. The global offshore engineering spend is expected to grow to anything between USD150-225 Bn by 2020 and India could have around 20-25% share of this industry. Automotive offshoring is expected to contribute a big chunk of this engineering offshore pie.

As per another recent survey by Frost & Sullivan, Indian automotive engineering service outsourcing industry is expected to clock a 32% growth by 2012-13 and is likely to generate USD 2.2 bn in revenues for the country in next two years. The report also emphasized on spin-off of automotive engineering services from IT sector to realize better growth opportunities.

Leading global automakers like Toyota, Daimler-Chrysler, Fiat, Ford etc source components from India. Both Toyota and Volvo source gear box for the automobile range from India. Daimler-Chrysler not just sources components but also uses IT services for integrating electronic gadgets in their cars. In fact Daimler-Chrysler sourced USD125 Mn worth of such components and software from India.

Power Sector Tops Investment in H1 2008

Realty surprisingly makes it to the second spot

A study conducted by the Associated Chambers of Commerce and Industry of India (Assocham) has put the power sector in the country in the numero-uno position in terms of investments received in the January-June 2008. The power sector received investments worth Rs 1,959,13 cr in the stipulated period, accounting for almost 31% of the overall investments in the corporate sector. Power majors like Tata Power, Sterlite Industries, Jindal India Thermal Power and Lanco Group are among the corporates that have lined up big investments in the sector.

Second in line in investments was the realty sector, a surprising fact, even after interest rates have spiraled high, and there are reports of slowdown in demand for real estate. The sector attracted investments worth, Rs151,000 cr for the next two to five years. Omaxe, Uppal Group Developers and Mahindra World City, were among the major companies unveiling their investments in the sector.

Others in top five in descending order were the steel sector with investments of Rs 1,086, 09 cr, retail sector with Rs 8,92,00 cr, and followed closely by the telecom sector with Rs 8,91,00 cr. Steel sector saw investments majors like Vedanta Resources, Tata Steel, Bhushan Steel and JSW Steel, the retail sector growing at an estimated 25%, saw investments by corporate retailers and real estate developers like Reliance Retail, Parsvanath Developers and Videocon Industries, while aggressive marketing and falling tariffs by major telecom players like Reliance Communication, Aircel and Quippo Telecom Infrastructure contributed to the boom in the sector.

Oil & Gas, Automobile, IT, Construction and Manufacturing and Ports & Shipping were the remaining sectors that made it to the list of top ten with investment figures ranging from Rs 30,000cr to Rs 90,000cr.

IRDA Committee to set new norms for IPO and diversifying risk

The Insurance Regulatory Development Authority (IRDA) has set up a committee for working out guidelines for valuation of insurer companies and the likely initial public offer (IPO) price. The committee will look at four major aspects viz, mechanism to value the surplus that will be generated over time; the acquisition costs that consists of the commission expenses and the initial expenses for a product; will the IPO will take into account the initial expenses, the investment income, the future mortality risk, claims ratio, lapsation experience of the insurance company and, accordingly, work out the surplus or the deficit and the discount it to the present value of the business.

The formation of the committee has been staged at the right time, with major life insurance companies planning to list next year. According to the present regulations, an insurance company has to list within 10 years of operations. SBI Life and HDFC Standard Life have made their plans clear, while the largest private player ICICI Prudential, may list in 2010-11.

IRDA also notified major changes in the investment norms for insurers that will help companies diversify risks and lower the strain on capital. For policy holders, it would also mean higher yield on investments. Insurers investing in IPOs of private sector companies will enjoy more freedom that could help policy holders garner higher returns from equities post-listing. They can also invest in fixed-income instruments such as mortgage-backed securities (MBS) and bonds floated by developers of SEZs. Insurers will get greater leeway in their investments in mutual funds and venture funds as well.

IRDA also made changes in the quantum of investments that insurers can in IPOs. At present, insurers can invest in an IPO of a private sector company if the minimum issue size is Rs 500 cr, while the amount is significantly lower at Rs 100 cr for investment in IPOs of public sector companies. The regulator has now fixed a uniform minimum issue size of Rs 200 cr.

Among other changes made by IRDA, it has created a level playing field between private players and Life Insurance Corporation (LIC). The biggest impact of these guidelines will be on LIC. Earlier LIC was allowed to hold up to 30% of stake in any company but now it may be able hold only up to 10%. It may have to dilute stake in companies where holding is more than 10%. LIC currently holds more than 10% in companies such as Ranbaxy, Mahindra, L&T.

Tata & Ambanis: Ethics Vs Acumen

In span of few months we have seen that one industry house has failed in its dealing with the government while other has succeeded in its endeavor to gain business. While, Tatas are sulking at the failure to break the political deadlock over its ambitious small car project; Ambanis have successfully negotiated with their political adversaries and twisted proposals for windfall tax.

Irony exists between the two industrial houses (well its three now but thinking more or less unites Ambanis). One of the oldest business houses, Tata, believe in more old fashioned way of creating wealth, setting up private ventures with financial institutions. But, they are quite modern about business ethics and governance. Ambanis, on the other hand are more flamboyant with creating wealth for themselves and public through public investment. Though, the same public (and even government) doesn’t have a hint about the company structure and shareholding pattern.

Both Ambanis and Tata pursue policy matters but Ambanis do it more aggressively, they manage to get politicians on every committee to lobby for them. The Ambanis have been maneuvering policies for their good; if something would adversely impact their business they never hesitate to reach out to the top. Tatas on the other hand wait for the policy announcement to come out. Tatas had to scuttle their aviation project with Singapore Airlines due to policy hurdle but Ambanis never had to. One Ambani kept windfall tax at bay; the other prevented scrapping of dadri power project and got into Pension Fund management, where it was not even shortlisted.

But, Ambanis had to pack up their retail biz in many states. Tatas to had trouble with land acquisition in past but not as much as it is in Singur. Also, Tatas seem to have been unable to use their experience in dealing with states that have had inconsistent economic policy (i.e.Bihar, Chattisgarh) with respect to Bengal. They really believed that communist would replicate china’s model without any trouble. Ambanis have been cleverer in continuously amending their offer for land acquisition in case of MahSEZ in new Mumbai. One thing that is visible is none of the Indian industrial houses have learned lesson to tackle is public unrest over industrial projects.

Indian Consumers now to Access IPTV for Entertainment

Setting the path for consumers in India to get access to television content over broadband internet, the government approved guidelines for allowing broadcasters to share their content with Internet Protocol Television (IPTV) providers. The present norms allow broadcasters to share their channels only with cable and direct-to-home platforms. IPTV service will not be costlier than DTH or cable providers as the government has also made it clear that that IPTV provider would get channels from broadcasters as per broadcasters’ rates fixed by TRAI.

IPTV is a new platform for delivering television content using an IP network and high speed broadband technology. The rapid development in telecom technologies along with increasing digitalisation of broadcasting is driving services like IPTV. For consumers, the move will mean access to interactive content on what will be a two-way link, enabling services such as video on demand, time shift TV, group-gaming and interactive advertising.

The decision to amend the laws is likely to benefit telecom players such as Bharti Airtel, Reliance Communications and BSNL. MTNL had already started offering IPTV services in Mumbai and it would have first mover advantage. BSNL has also entered into a tie-up to make a foray into IPTV service.

Internet service providers (ISPs) whose net worth is more than Rs 100 cr will also be able to offer the services. However, only two or three ISPs would be able to offer this service, as only those many have net worth above the prescribed limit. Broadcasters would however benefit to great extent as the current cable and DTH platforms are struggling to carry more than 200 channels, while there are 360 channels with down linking permission waiting on the anvil, which will be benefited by IPTV. The IPTV platform also presents cable operators an opportunity to move closer to complete digitization and also offer a service with potential for higher billings per customer.

Telecom Regulatory Authority of India (TRAI) had submitted its final recommendations for IPTV to the Information and Broadcasting (I&B) Ministry several months ago, but it got approval only now. The other recommendation to increase foreign direct investment (FDI) in IPTV services to 74% as opposed to the current 49% in the cable sector has still not been approved. The regulator also authorized the department of telecommunications (DoT) to permit any telecom licensee to provide IPTV services. Any cable operator registered under the Cable Television Network (Regulation) Act, 1995, also does not need an additional license for IPTV services.

The content transmitted on IPTV will come under regulation by multiple agencies. While, the ministry of I&B will ensure adherence to the programming and advertising code, the ministry of communications and information technology and DoT will monitor the Internet content as per the IT Act of 2000.

With 40 mn landline connections capable to deliver IPTV, the future looks bright for the service. According to a December report by industry body ASSOCHAM and consultant Ernst and Young, IPTV will garner one million subscribers by 2010.

Government says Robust Economy Leading to Buoyant Growth in Tax Collection

Even as the country’ inflation peaked at a 13-year high of 12.4% for week ended August 2, the government pointed at a robust tax collection to indicate that the economy remains healthy. Reports had earlier appeared showing regarding early signs of an economic slowdown based on advance tax payments by corporates during the Financial Year 2008-09.

Among the figures released by the government, the total direct tax collection during April-July 2008 is Rs 71,648 cr as against an amount of Rs 48,756 cr during the same period last year translating into a robust growth rate of 47%. The tax deducted on source (TDS) during April-July 2008 on payments received by companies increased by 60% to Rs 22,128 cr from Rs 13,782 cr during the same period last year. This increase in TDS collections, is reflected in relatively lower growth rate of 24% in advance tax payments as compared to 28% during April-July 2007-08.

Though the direct tax collection has been up but the figures presented by the government are for Apr-Jul period and the government itself forecasted slowdown in the economy for the coming quarters, thus government itself has negated the argument fir strong growth.


The total direct tax collection of India, Asia's third largest economy after China and Japan, comprises mainly advance tax payments, tax deducted at source, self-assessment tax payments, and post-assessment tax collections. At the level of the taxpayer, advance tax payments and tax deducted at source are substitutes and inversely related to each other, that is, if the tax deducted at source (TDS) is high, a relatively smaller amount is payable as advance tax.

Indian Companies Most Bullish in Overseas Acquistion

Reinforcing the growing clout presence of Indian corporates in the international market, an analysis of deals between emerging and developed economies since 2003 by KPMG, showed that there were 322 completed deals where Indian buyers have acquired companies in the major developed economies. This, compared to 340 deals completed in the opposite direction, where developed economy entities bought into India, as per the study by Emerging Markets International Acquisition Tracker (EMIAT).

India is also far ahead of other BRIC economies in terms of becoming a net exporter of deals. Within EMIAT, in volume terms, the country’s outbound deals now equate to 95% of their inbound total. By comparison, Russia boasts a 30% figure, while China and Brazil lag behind at 12% and 9 % respectively.

High-profile buyouts such as Indian conglomerate Tata's acquisition of Jaguar-Land Rover and mega-merger with Corus are just the tip of the iceberg. Many of the deals clocked by KPMG are relatively small; the average value may be just $50 mn, once the huge players such as Tata and drug giant Ranbaxy are excluded. Takeover targets have also been diverse, from Whyte and Mackay whisky, bought by United Breweries last year, to London's oldest stockbroker ‘Hichens, Harrison & Co’ bought by Religare Enterprises.

Meanwhile in first half of 2008, the EMIAT study shows that, 51 Indian companies closed deals in developed countries, while Russian companies bought 11 firms and South Korean companies closed 8 deals. For India, the outbound deals (51) outpaced inbound deals (17) in the first half of this year. And, going by the trend, this country is surely on its way to become to a net “deal exporter” by next year.

Corporate India leads in Web2.0 Acceptance in Workspace

Indian corporates seem to outsmarting the rest of world when it comes to the use of technology in workspace. India Inc is not only becoming tech-savvy but it’s now also Web2.0 savvy. Though, India Inc is not in favour of social networking sites as only 22% of them find it important tool in office space as per a McKinsey Survey (Building the Web2.0 Enterprise), whereas 31% of corporates in China, 35% in N America believe it’s a useful tool.

However, India Inc leaves behind rest of the world in its acceptance of Blogs and Wikis. Surprisingly, 46% of corporate India finds blogs as useful tool in comparison with 37% of corporates in N America, 35% in China, while Europe is far behind with only 28% finding blogs as useful corporate tool. Similarly, India Inc finds wikis an attractive knowledge tool, which can be gauged from the fact that wikis have become extremely important tool for public information in India and is very popular with public.

The most astonishing outcome of the survey is the popularity and acceptance of videosharing and podcast by corporate India. Considering the fact that broadband use is extremely scarce in India and is mostly limited to corporate offices, still companies in India believe in using videosharing tools for corporate videos. Also, ipods in India are not much used by the population but still Indian corporates find podcast as useful tool is extremely surprising. A 23% of corporates in India find podcast useful tool compared to just 20% of N America, which is home of ipods, and a similar 20% corporates in Europe.

CMIE puts India’s Economic Growth Above 9% Despite Dismal Expectations

The Centre for Monitoring Indian Economy (CMIE) has kept its outlook high for the Indian economy in its monthly report despite dismal expectations. It expects the economy to grow at a robust 9.4% in FY09, marginally lower than its earlier projections of 9.5% in June, but higher than the prediction of 9.1% in February. This marginal change is because of a downward revision in its estimate of the growth of the industrial sector. CMIE had earlier predicted a growth of 11.4% in industry. However, following a slowdown in the output of a few industries, it now believes that the industrial sector would grow by 11.1%.

CMIE growth projection is in sharp contrast with the economic forecast made by Reserve Bank of Indian (RBI) and the Economic Advisory Council of the Prime Minister. CMIE report has denounced the downcast projections by both of them. The RBI had predicted 8-8.5% real GDP growth but, it later brought it down to about 8%, while the Economic Advisory Council of the Prime Minister, on the other hand, projected the economic growth at 7.7%.

CMIE’s relatively upbeat forecast is based on disregarding two observations made by other forecasters. Firstly, it considers the Index of Industrial Production (IIP) to be faulty and does not regard its sharp slowdown in the first quarter of FY09 to be a reflection of the reality. It said that while some prominent industries like cement, sugar, glassware and milk powder may witness a slowdown, the investment climate in the country has generally been good. And secondly, it does not think that inflation is extraordinarily high so as to hurt growth. It believes that the Wholesale Price Index (WPI) is an inappropriate measure of inflation and the Consumer Price Index (CPI), a more appropriate measure, has seen a less vicious rise.

IRDA Defers MTM Rules for Insurers, Mulls Benchmarks & Disclosures to value Insurance Companies

Giving a huge reprieve to the insurance industry and saving it from losing several hundred cr this financial year, the Insurance Regulatory and Development Authority (IRDA) has postponed making it mandatory for insurers to mark-to-market (MTM) their portfolio in gilts from this fiscal. IRDA had issued a circular in March 2008 asking insurance companies to value gilts at the lower of the amortised cost and the market value to compute the solvency margin from this fiscal. But, the plan has been deferred now as the regulator is yet to finalise guidelines on segregating the investment portfolio.

The MTM rules would have hit the solvency margins of insurers if it would have been implemented from this year. Solvency is the ability of an insurer to pay claims. Solvency margin is the excess of assets over liabilities that an insurer maintains as a prudential measure in the interest of policyholders. It is similar to the capital adequacy ratio (CAR) for banks. The solvency margin guidelines are structured in such a way that insurers have to bring in more capital as their business goes up. With businesses having grown sharply, insurers are feeling the pressure of maintaining solvency margins at 1.5% of the statutory requirements. If the companies were to mark-to-market all debt capital available for meeting solvency margin requirement would take a hit.

The banking industry too has been already been hit hard by the rise in the yields on government securities. However, they have been protected to some extent as the regulator allows them to classify most of their debt investments as ‘held-to-maturity’. Such a classification shields these securities from the mark-to-market requirement. Insurance companies have been demanding a similar HTM category.

IRDA has deferred the MTM requirements to help companies adhere to their solvency requirements. Else, the margins would have taken a knock in a volatile market where interest rates are moving up. Hence, companies will continue to follow the book value method for computing the value of debt they hold for solvency margins.

IRDA is also on track to develop commonly-accepted benchmarks and disclosures to value insurance companies as this would be crucial when Indian partners dilute their shareholding. The present regulation requires Indian promoters with a majority shareholding to dilute their stakes through an initial public offering (IPO) at the end of the tenth year of operations.

Valuation of companies is generally based on the price-earning (PE) multiple, a high PE multiple suggests that investors expect higher earnings growth in the future. But this exercise is much more complex for insurers. Once an insurance company receives the premium from the policy holder, there are various things that the money goes into before getting invested such as the money for commission and other marketing expenses. The balance is invested in debt and equities and interest is added to the original investment. Then, on the date of valuation the solvency margins and mathematical reserves are deducted from this corpus.

The balance amount in the corpus is used to pay claims and the net money that is available is the profit. If the insurance product is a participating product eligible for bonus only 10% of the profit belongs to the shareholder. The balance is used to declare bonus and belongs to the policy holder. If it is a non-participating product, the entire profit belongs to the shareholder. Hence, the profit can vary widely as the actual experience may differ from what has been assumed in pricing cost, claims experience, investment yield and so on. In the worst-case scenario, the projected profit will be much lower than what has been assumed in the pricing. Valuation of insurers, hence, hinges on the assumptions and hidden profit which can fluctuate wildly.

Internationally, this issue has gained prominence with professional bodies setting valuation norms. Rating agencies event comment on these norms. Further such issues are expected to take the centre stage, when the industry consolidates through mergers and acquisitions. Currently, the new business achieved profit, which reflects the value of a company’s earnings potential under a set of assumptions is used for the valuation of insurers. Another method is the embedded value method or the value of the existing business in the books of the company.

Figures - India’s insurance sector accounts for around 5% of the GDP and has the largest number of life insurance policies in force in the world.

Government Gives Private Pension Funds Freedom to Increase Stock Market Exposure

Coming close on heels of ending the monopoly of SBI in managing EPF accounts, the government has now allowed private provident, pension and gratuity funds to invest up to 15% of their investible funds in the stock markets, one of the new financial sector reforms by the government.

This move is aimed at making the massive cash balances that provident funds sit on every December-January, in the absence of central government securities to park them in, history. In 2007-08, the EPFO had kept more than Rs 10,000 cr idle, as per a recent audit report. Incidentally, EPF’s earnings for 2007-08 are, therefore, only enough to pay 8.25% interest compared to 8.5% paid in the year before. The finance ministry’s new investment guidelines, that will become operational from April 1, 2009, can rectify this, going forward. The guidelines leave no room for provident fund managers to cite investment restrictions put in by government for lack of returns on the money put in by the 40 million organised sector workers as their retirement savings.

As per the new guidelines, the funds can soon directly invest in shares of companies on which derivatives are available in the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE). Currently, about 228 single stock futures are traded in the futures and options segment of NSE, with about 39 more to be added from the last week of August.

The other changes made in the investment pattern include merger of Central Government Securities, State Government Securities and units of gilt Mutual Funds into a single category and allowing investment up to 55% of their corpus, providing a flexible ceiling for various category of instruments instead of fixed investment ceiling as at present; providing new category of instruments, such as rupee bonds of multilateral funding agencies, money market instruments and permitting investment in term deposit receipts of not less than one year duration issued by scheduled commercial banks.

The new investment pattern also recognises the fiduciary responsibility of the trustees and the need for exercise of due diligence by them. It gives them greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio. Moreover, the trustees will have freedom to exit from a rated financial instrument when their rating falls below investment grade as confirmed by one credit rating agency. The trustees have also been given freedom of trading in securities, subject to the turnover ratio (i.e., the value of securities traded in the year divided by average value of the portfolio at the beginning and end of the year) not exceeding two.

Significantly, the new guidelines have raised the cap on equity investments from 5% to 15%. Although when the draft guidelines for such a move were made in September last year, the finance ministry had suggested doubling their capital market exposure from 5% to 10% while reducing their exposure to government securities from 40% to 35%.

Interestingly, very few of the funds allowed to invest in equities have even utilised their cap of 5% present currently. Even the funds, which do invest in equities, have an exposure of only 1-2%. Further, with the recent spike in bond yields, government securities as well as corporate bonds have been giving returns of over 9%. This is well above the returns of 8.5% which these funds are supposed to guarantee.

While the bouquet of investment options has been expanded, trustees have been made more explicitly responsible for investment decisions. However, sections feel since India is yet to get professional trustee companies in place, the new options may remain unused as existing trustees may shy away from taking hard decisions. While market participants have welcomed this proposal, the general perception is that a number of other regulations need to change to make equity investments viable. The main bone of contention is that of the guaranteed returns of 8.5%. In case the fund fails to throw up an 8.5% return, the employers are expected to provide for the rest.

Hence only time will tell, how many of the funds will take the risk to increase their exposure to equity, given the current volatility in the markets and the history of investments by such funds in the stock markets. However if they do invest, it will provide a much needed fillip for the stock markets.

IIP Down but Employment still to Grow?

The latest industrial production data painted a gloomy picture on the growth of industrial production as IIP for the Q1 2008-09 fell to 5.2% (y-o-y). almost everyone is predicting contraction of industrial activity and slowdown in economic growth. However, the recent KPMG survey on business outlook shows as different picture. The survey showed that the manufacturers were expecting business activity, capacity utilisation and employment to rise. In fact, India was shown as the country with second biggest expectation of employment generation, much above China but below Brazil.

In India, around 50% enterprises were optimistic about adding new workforce to expand their business presence. This survey is in sharp contrast with the just released IIP figures, which were less optimistic and hinted in slowdown of industrial activity in future.

BSNL IPO: Anti-privatisation or under-valuation?

Government and Trade unions are again at clash over mulling IPO of public sector telecom giant BSNL. Trade unions see this move as a step towards privastisation of BSNL and thus they are dead against the PSU going public. While the government insists that listing of BSNL is necessary for granting “Navaratna” status, union leaders feel otherwise. They point out “Navaratna” companies such as HAL and LIC, which are still not listed. Another reason for unions’ opposition is the past decisions by government of ultimately selling listed PSUs like VSNL and BALCO.

Unions are also using the VSNL/BALCO sale as argument for undervaluation. They have accused government of undervaluing the PSUs and are using case of BALCO sale to strengthen their argument. The government has valued BSNL at around $100 bn based on the Vodafone and HutchisonEssar deal. However, the unions are in opinion that BSNL is valued ten times more than the government valuation, which would put it at $1,000 bn. According to union’s estimation, the actual divestment of shares for the IPO collection should be 1% of BSNL shares not 10%.

The BSNL valuation funda becomes murky, as the government assessment based is based on some deal and some other company with less similarity to BSNL. Vodafone, unlike BSNL attracts customers that attach premium to the service offered by the service provider while, BSNL’s product offering is considered economical. BSNL also has large number of workforce and its productivity and efficiency yet to be determined. Its growth rate has not been as high as some private players in GSM market.


But, BSNL still is the largest telecom player and has virtual monopoly over wireline and rural telecom business, plus it is a big time player in long distance call and internet business. Its tower unit will attract huge valuation. Also, unions prefer companies to be valued on their assets rather than their net worth and business prospect. The government, which is in desperate need of funds will like go for IPO as early as possible but its one time friend and present nemesis, CPI & CPM, are bound to create ruckus over the issue of valuations.

Exchange traded currency futures to finally hit India

The RBI after month of deliberation finally unveiled norms for trading in currency futures. Banks will need RBI nod to participate in forex futures. It also stipulated that banks should have a minimum net worth of Rs 500 cr, a capital adequacy ratio of at least 10%. They should have made a net profit for the last three years to qualify for trading in currency futures on exchanges. Banks will also be required to get the approval of their board of directors in case they qualify. The RBI has further clarified that banks which do not meet these requirements (including urban co-operative banks) can participate only as clients, and that too after securing a regulatory nod. The currency futures market will be allowed in stock exchanges or new exchanges recognised by SEBI and would be bound by the guidelines issued by the RBI and SEBI.

To start with, RBI has allowed only resident Indians or locals to participate in currency futures, thus effectively keeping out foreign investors such as portfolio investors and hedge funds besides NRI’s for now. Initially, trading contracts denominated in the US dollar and the Indian rupee will only be allowed. The size of the contract has been set at $1000 and the tenure at 12 months. The central bank has also specified that the contracts will be quoted and settled only in rupees. The trading of currency futures shall be subject to maintaining initial, extreme loss and calendar spread margins and the clearing houses of the exchanges will ensure maintenance of such margins as per capital market regulator’s guidelines issued from time to time. Trading members have been prescribed a position limit of $ 25 mn across all contracts. However, the gross open position of a trading member that is a bank, across all contracts, shall not exceed 15% of the total open interest or $100 mn, whichever is higher.

The RBI may from time to time modify the eligibility criteria for the participants, modify participant-wise position limits, prescribe margins and/or impose specific margins for identified participants, fix or modify any other prudential limits, or take such other actions as deemed necessary in public interest, in the interest of financial stability and orderly development and maintenance of foreign exchange market in India.
The norms have kept in mind that that excess speculation in the Indian currency is curbed as the norms are similar to the norms followed by banks in other segments. Rumors have it that BSE, NSE and MCX have already submitted a proposal to launch a platform for currency futures, and more entities are expected to submit applications to the regulators. On the banking front, most banks would be attracted to become members as it means captive business for them, but banks may prefer setting up a subsidiary for this business, as it is a relatively new activity.

What are currency futures?

Currency futures are standardised foreign exchange derivative contracts traded on a stock exchange to buy or sell one currency against another on a specified future date, at a price specified on the date of contract, but does not include a forward contract.

Finance Ministry mulls changes in ADR, GDR pricing formula

In a bid to aid Indian companies to raise money overseas, especially in the present falling market, the finance ministry has proposed changes in the pricing formula for global depository receipts (GDRs) and American depositary receipts (ADRs). In falling markets, the current pricing norm effectively results in the overseas issue being priced farther from, and higher than, the prevailing domestic market price. Companies wishing to tap the overseas market may not do so as the offer price is not right. The ministry has proposed to reduce the time period for calculating the minimum offer price for overseas issues to two months from six months earlier.

The government move comes after representations from companies and intermediaries that the pricing formula effectively shuts out the fund raising avenue. Companies have struggled to find takers for these issues as the shares are available cheaper on the bourses.

Currently, the ADR/GDR issue price is determined on the basis of the higher of the last six months’ average price or last 15 days’ average price. The idea to keep six months average price was to avoid promoters from doing bulk allotment at a discounted price. The logic was that the promoter or interested parties cannot artificially depress prices for such a long period. The finance ministry has now proposed to reduce it to the higher of the two months’ average price or the last 15 days average price. The new pricing rules are expected to reflect accurate and more realistic prices of the ADR/GDR issues.

Experts in the industry have come out with mixed opinion for the move as some feel that the timing of the issue is more critical, whether two months or six months, especially in the present volatile markets. These are the companies which are in desperate need of alternative financing routes as debt becomes scarce and expensive in the local market as the Reserve Bank unleashes anti inflationary measures. It is more important to give companies a free hand on pricing, they feel. However, many experts also feel that the reduction in time period will help companies come out with far better realistic pricing than the previous waiting period helping them raise money.

Is ATF Reason for Airline Losses?

Jet demands 15% hike in fares

Jet Airways hinted that it was in dire need of increasing fares by atleast 15% to remain profitable. Mr. Prock-Schauer went on to demand everything from Aviation Turbine Fuel (ATG) rollbacks, relief on landing and parking charges to deffering User Development Fee (UDF), which is most derided by customers. His wish list almost killed the revenue generation model of aviation sector. But, has the ATF price hike has made business so unviable for domestic airline companies.

ATF constitutes 70% of the operating cost of the domestic airlines but a large portion of it is also recovered by airlines and they also pass on the hike in ATF. So how do they incur loss? Well, airlines would be able to recover it only if they are efficient and their occupancy rates high. Jet Airways is not a good performer on both the counts. It had indulged in shabby merger deal with a shady airline- Sahara air, which made it more inefficient and also added to its cost. In June, Jet Airways was able to fill only 68% of its seats. Though, it was better than Kingfisher’s 64% but was not the best in its class. Two low-cost and a small full service carrier had much better occupancy rate.

Smaller but full service airlines like paramount operated at much higher occupancy rate of 80% despite not being a major player in Delhi-Mumbai route. Also it has remained efficient and profitable by following a strategy largely followed by low-cost airlines for short haul and smaller routes. It purchased smaller and fuel efficient aircrafts, plus it saved on landing and parking charges, which government of India has relaxed for small planes and small town airports. Air Deccan had initially followed the same strategy but they abandoned it for aggressive expansion, for which they are now paying.

Almost all the domestic airlines carved their strategy around growing air traffic but forgot other factors and when faced with competition indulged in consolidation, acquired with same problem. Now, each one wants way out but does not know which way it would be.

India ranks poorly in the top 50 of UNIDO’s global Industrial Competitiveness; Automobiles and Textile industry make it to the top

India has been ranked 41st in the latest industrial competitiveness report prepared by United Nations Industrial Development Organisation (UNIDO). The ranking is based on the competitive industrial performance of countries. It is based on two sets of components viz., industrial development indicators and the competitive industrial performance index. It benchmarks a country in the backdrop of liberalization and globalisation. The scorecard suggests about competitive performance of a country, which is measured in terms of manufacturing value added per capita and manufacturing exports per capita.

The scorecard also takes note of industrialization, which suggests share of manufacturing value added in GDP and of medium and high technology in manufacturing.
UNIDO, in an accompanying statement said, that the scorecard brings out a persistent pattern of performance over the years among regional groupings of countries, with industrialized countries leading the rankings and transition economies tightly grouped in the middle ranks.

Singapore topped the ranking followed by Ireland, Switzerland, Japan, Belgium, Sweden, Finalnd, Germany, Republic of Korea, Taiwan, France, USA, Hong Kong SAR, Austria and Slovenia in the top 15. India although ranked 41st fared better than its neighbours with Pakistan ranking at 55, Bangladesh at 67 and Sri Lanka occupying the 75th position.

However, India made it to the top 15 automakers of the world, and among the top five in the leading developing countries category of a separate UNIDO report on motor vehicle manufacturers, thanks to a growing auto industry. According to the report, India ranked 12th in the list of world's top 15 automakers, which is led by Japan followed by the US and Germany. In the leading developing countries category, India ranked fourth. The list is topped by Mexico, followed by Korea, Iran. Brazil held the fifth position.

Also, Indian textile industry came fifth amongst top 15 textile producing countries in the world and India also made it to the list of world's top 15 producers of chemicals, electrical machinery, basic metals (iron and steel, non-ferrous metals) and other products.

RBI increases Non-deposit taking NBFCs’ CRAR to 12%

The Reserve Bank of India (RBI) on August1 in a move to tighten regulation on Non Banking Financial Companies (NBFCs), with asset size of Rs 100 crore and above, has increased the capital to Risk Weighted to Assets Ratio (CRAR), from the current 10% to 12% by March 31, 2009, and to 15% by March 31, 2010.

Earlier non-deposit taking NBFCs were subjected to minimal regulation. But, in the light of the evolution and integration of the financial sector, the RBI felt that all systemically relevant entities offering financial services ought to be brought under a suitable regulatory framework to contain systemic risk. Systemically, important non-deposit taking NBFCs will also have to make additional disclosures in their balance sheets from the year ending March 31, 2009. These disclosures relate to CRAR, exposure to real estate sector, both direct and indirect and maturity pattern of assets and liabilities. The RBI’s move might be aimed at discouraging the practice of corporates to divert funds to real estate through their NBFCs.
Earlier on July 31, the RBI had said that NBFCs could not include the balance in their deferred tax liabilities within their tier-I or tier-II capital base. The RBI also stressed that deferred tax assets would be treated as a non-physical asset and this, too, would be excluded from NBFCs’ tier-I capital. Recognising that certain NBFCs may be unable to comply with the required CRAR requirements, RBI has given these players an appropriate transition period.

Cognizant Second Half Guidance Shatters Indian IT Sector’s Growth Prospect

Cognizant technologies’ lowering of its guidance for next half of the year is causing shivers to the Information Technology industry in India. Cognizant Tech cuts its second half growth by almost 5%. The company made it clear that it was anticipating slowdown in receiving business from clients more specifically from healthcare sector.

Though, healthcare as a vertical contributes less than 3% of the Indian IT exports, but the concerns remain at the macro level as BFSI has already taken a beating, more such verticals falling prey to the US slowdown will add misery to the smaller players in the industry.

Also, the hoopla surrounding the IT industry that any bad news for US economy would translate into more offshore work would not entirely come true. Cognizant’s guidance reveal that as the economic scenario worsen, more and more companies might be unwilling to start new projects. The company has also stressed the need to focus on managing the expenses and increasing utilization of resources, thus indicating that in near term most of the companies in IT industry would be paying attention to remain efficient to retain profitability rather than generating higher growth from new projects. The only positive outcome of Cognizant’s guidance was for consulting and knowledge process outsourcing business as company intended to expand its service offerings in these areas, a large chunk of it may come to India.

3G Services & Number Portability to finally hit India; Delhi Mumbai circle tough challenge for Indian Telcos

India’s telecom subscribers are finally going to see the light of the much hyped and discussed 3G services and number portability. The government unveiled its plan to take India’s mobile revolution to the next technological level by opening 3G spectrum auctions to global players that would allow better multimedia services and also quick data and video transfer. Government also announced the first step towards number portability, a major consumer-friendly move that will let the users to switch their mobile operators without losing their numbers.

The 3G spectrum will be initiated in the next 15 days under the supervision of an independent agency to ensure full transparency, there would also be strict roll-out obligations to avoid spectrum hoarding. The Auction is expected to garner around Rs 30,000 cr (around $7 bn) to the government exchequer, a huge respite for the government during the current phase of rising global oil prices, huge subsidy payouts, double-digit inflation and slowing growth.
Currently the country has 60 Mhz of 3G spectrum available, the auction will take place in the 2.1 Ghz band, with 3G services likely to be available by the mid-2009. Initially, only two to five operators would be allowed to offer 3G services in each circle. However in the Delhi and Mumbai circles, only one operator would initially be allowed to offer 3G services, apart from State-owned MTNL due to spectrum crunch. Similarly, for the rest of the country the other government telecom giant, BSNL would get 3G spectrum. The base price for a pan-India license will be Rs. 2,020 cr for each bid, while UASL fee would be Rs. 1,650 cr.

The government also took concrete steps towards introduction of mobile number portability (MNP) by announcing guidelines for an MNP service licence. MNP would first start in the four metros in next two months and subsequently roll out in rest of the country over the next 6-12 months. According to the guidelines, the whole country will be divided into two MNP zones consisting of 11 service areas with two metros in each zone. The MNP service provider and the mobile operators would not be allowed to have equity (direct or indirect) stake in each other's operations. No single company/legal person/the MNP License applicant or MNP Licensee company either directly or indirectly will have any equity, in any of the telecom service provider (basic service, UAS, Cellular Mobile, NLD or ILD) and vice-versa.
The government would allocate the licenses for MNP soon and the eligible applicant should have an experience of operating successfully, number portability solution for a mobile subscriber base of not less than 25 mn in one or more countries for at least two years. The applicant company shall also be required to have a minimum paid up capital of Rs 10 cr on the date of application and a networth of Rs 100 cr. The applicant company or its share equity holders having direct equity of 26 per cent or more in the company should have the required experience. Also, the government has fixed one-time, non-refundable, entry fee of Rs 1 cr for the grant of MNP services license and the company shall have to pay annual license fee of one per cent of the Adjusted Gross Revenue. According to method of selection, the pre-qualified applicants/bidders shall be subjected to a "techno-economic Evaluation" for final selection. The MNP license shall be for a period of five years and can be extended by another five years by the Department of Telecom.

What is 3G?
3G represents the next step in the evolution of mobile telephony, offering markedly greater capacity and efficiency than the current 2G systems. While 2G is focused on voice, 3G supports high-speed data of at least 144 kbps enabling broadband internet access on the mobile, and ‘‘triple play’’ features like mobile TV and converged communication services.

What is MNP?
MNP allows subscribers the freedom to retain their mobile number while switching over to a different service provider. The system when implemented will allow consumers more choice, lower prices and significantly better quality of service.

Will Indian students get laptop for $100?

The government of India in tandem with two leading research institutes in the country is working on developing a laptop that will cost $100 (Rs 4000). This news had earlier caught the eye of almost all over the world, after it was published that the laptops will cost only $10 (Rs 400). However, this was later rectified by the government. This numeric error although an embarrassment for the Government, but it doesn’t overshadow the aim of the initiative, which is to give Indian citizens as much access to computers and the Internet as those in wealthier countries. At the moment only 4.38 mn Indian citizens have access to broadband internet, woefully low as compared to the country’s population of over 1.13 bn. Along with the low-cost laptop, the government also plans to give free bandwidth to every Indian for educational purposes.

Research work toward the development of the low-cost laptop is being done at the Indian Institute of Science, Bangalore and the Indian Institute of Technology, Madras. The government has not yet disclosed any information about the laptop's features and technical specifications, nor has it said whether the price would include a government subsidy.
India is not a part of the 'One Laptop Per Child' (OLPC) program after officials pulled out saying that it was not practical to hand a laptop to every child. The HRD ministry in 2006 had rejected the OLPC model terming it as quite expensive. The OLPC project was a $50 laptop which is yet to be delivered. However Reliance Communications has launched a pilot OLPC program last year.