SEBI Issues New Guidelines for SME Exchange

SEBI has come up with new guidelines for SME exchange. SEBI has set a post-issue upper limit of Rs 25 cr capital at face value for the companies that wish to get listed on such exchanges. If the company reaches this upper limit it wouldn’t be allowed any follow up issues, any follow-up issue has would only be permissible if new capital doesn’t not exceed Rs 25 cr.

In case companies listed on SME platform exceeds the Rs 25 cr limit, the company will be compulsorily shifted to the main board of the exchange. SEBI has absolved SME companies on SME exchange of requirement of submitting quarterly number, but they can do it on half yearly basis. Such companies are also will have privilege of forgoing the need to publish their results instead they can put their result on website.

Factoring Services Mooted for SMEs

The Ministry of MSME has mooted the idea of allowing financial Factoring services for Micro and Small Medium Enterprises. It is in discussion with Finance Ministry on proposal for factoring services.

Factoring services are still niche domain in credit financing in India and is largely domain of a few international banks, though financial institutions like SIDBI along with nationalized banks have undertaken study of providing factoring services to various small and medium enterprises.

Factoring services involves raising capital through leveraging its accounts receivable (credit sales) to gain access to cash. The financial institution providing factoring services uses its own mechanism to provide upto 80% of accounts receivable to the client. But, such kind of services is yet to take-off for SMEs.

The ministry is examining the legal and regulatory aspects on the proposal, which would require legislative amendments in terms of taxation and financing.

The credit-deprived Small and Medium Enterprises (SMEs) are likely to benefit from the concept 'factoring services' as it would be an alternative window for SME financing in India. Dinesh Rai, Secretary, Ministry of MSME recently motioned that the Ministry of Financial Services are not too much in favor of legislative support. But, he feels that if there is no legislative support, it will be difficult for SME players to attain success in a big way.

Easy Cash Turns Killers for Indian Retail

The retail boom has come to grinding halt in India. Just a few months back Reliance had announced restructuring of its retail business. Then Subhiksha problem appeared, it was unable to finance its operations. Now, Vishal retail has run into trouble. The company is also facing liquidity crunch and is shutting down a large number of shops and cutting its employee numbers to stay afloat.

Easy money had made it possible for Indian retail companies to go for expansion mode straight from incubation. This had become corporate philosophy for expansion programs of major retailing companies. Every company in hurried desire to gain the first mover advantage had indulged in aggressive expansion on borrowed money. Once the liquidity problem stated becoming apparent in Indian market, these companies started facing cash trouble to run their operations. Easy availability of cash had led to more companies becoming overtly dependent on borrowed money to run their operations.

Subhiskha, like other retail companies over-ambitiously expanded everywhere leaving the company totally starved for cash. They didn’t bother either about its cash flows or cash reserves. This left company bewildered about its future and how to manage the current operations. Vishal Retail another darling of markets, followed similar path of growth and couldn’t see the situation getting out of hands.

Easy availability of cash in the market made retail companies short sighted with assumptions that markets would continue to grown and cash would remain available. This hypothetical assumption got translated into the business model, for which companies are paying today.

Irda Allows Overseas Operations of Life Insurance Companies

But keeps hands cuffed from full fledged operations

Irda (Insurance Regulatory & Development Authority) has set new guidelines for opening up of overseas liaison offices by insurance companies. Only those companies, which will meet the guidelines such as solvency rate of 1.5, good financial condition and more, will be allowed to open such liaison offices.

But, Irda has laid many restrictions on insurance companies. Such companies are prohibited from contracting any liability overseas, no agent would be permitted for conducting business hence no such commission would be allowed. Further, such companies would be required to provide information pertaining to their liaison offices, details of complaints and any expenditure incurred, regularly on quarterly basis.

Though Irda has allowed Indian insurance companies to open offices overseas but it has not fulfilled the wishes of insurance companies which were more interested in increasing their presence globally and to raise funds for their companies.

US Presidential Inuaguration and Market Gains

There is high expectation on Mr. Obama to deliver. Markets are banking on his economic proposals to revive the Wall-Street. Not all presidents have succeeded in matching the market expectations. If we look at look at the presidential inauguration since 1980s majority of presidents have given markets a respectable gain a year after their inaugurals.

Bill Clinton is the president who gave markets’ their biggest gain a year after his first presidential inauguration. It was whopping 28.9%, highest for any president sine 1980. he is the only president to have given markets positive gains in both terms as US president. Ronald Regan and George W Bush, are other two presidents who have been president twice. They are also the presidents who gave negative returns to the markets a year after inauguration of their first term. But they succeeded in giving markets a good gain a year after inauguration of their second term.

George W Bush has been the worst performers amongst all presidents since 1980s. Markets have gained only 7.4% a year after his 2005 presidential inauguration. His father George H W Bush had performed better, markets gained over 16% a year after his presidential inauguration in Jan 20, 1989.

It would be interesting to watch how markets perform during these turbulent times.

Taxing IT to Avoid Financial Trouble

Satyam fiasco has brought out a big question on how to check the business models and financial reporting of the Information Technology companies. Most of the technology companies in India have been enjoying tax exemptions over a decade and have also got exemption for a few years more.

As these companies are not taxed, their financial reporting can easily be fudged by anyone. Any IT company, which does not pay any tax on its revenues, can overstate it to mind boggling proportion without even being worried about the consequences. A simple and symbolic tax could be answer to all such malicious activity as ones these companies would be forced to pay tax on revenue and disclose their financial statement it would become tough for companies to continuously over state their revenues for more than a year.

There is also need to check on the business models of the companies, most of them are under tax exemptions and are now pulling themselves under SEZ status, it has become difficult to keep a tab on their functioning. Government needs to bring in regulation for disclosure of forex revenue generated from such units and the banks where they are parked. This measure will effectively keep a check on the financial activities of such IT firms and will also discourage many fly-by-night operators from posing as Information Technology firms to manipulate their IT SEZ status for retail purposes.

"The Worst Predictions About 2008"

"Just about everybody got wrong-footed by 2008, but some people's mistakes were truly spectacular. Here are some of the worst predictions that were made about 2008. Savor them—a crop like this doesn't come along every year.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" —Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008
At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8,500.

2. AIG (AIG) "could have huge gains in the second quarter." —Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008
AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

3. "I think this is a case where Freddie Mac (FRE) and Fannie Mae (FNM) are fundamentally sound. They're not in danger of going under…I think they are in good shape going forward." —Barney Frank (D-Mass.), House Financial Services Committee chairman, July 14, 2008
Two months later, the government forced the mortgage giants into conservatorships and pledged to invest up to $100 billion in each.

4. "The market is in the process of correcting itself." —President George W. Bush, in a Mar. 14, 2008 speech
For the rest of the year, the market kept correcting…and correcting…and correcting.

5. "No! No! No! Bear Stearns is not in trouble." —Jim Cramer, CNBC commentator, Mar. 11, 2008
Five days later, JPMorgan Chase (JPM) took over Bear Stearns with government help, nearly wiping out shareholders.

6. "Existing-Home Sales to Trend Up in 2008" —Headline of a National Association of Realtors press release, Dec. 9, 2007
On Dec. 23, 2008, the group said November sales were running at an annual rate of 4.5 million—down 11% from a year earlier—in the worst housing slump since the Depression.

7. "I think you'll see [oil prices at] $150 a barrel by the end of the year" —T. Boone Pickens, June 20, 2008
Oil was then around $135 a barrel. By late December it was below $40.

8. "I expect there will be some failures. … I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system." —Ben Bernanke, Federal Reserve chairman, Feb. 28, 2008
In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup (C) needed an even bigger rescue in November.

9. "In today's regulatory environment, it's virtually impossible to violate rules." —Bernard Madoff, money manager, Oct. 20, 2007
About a year later, Madoff—who once headed the Nasdaq Stock Market—told investigators he had cost his investors $50 billion in an alleged Ponzi scheme.

10. A Bound Man: Why We Are Excited About Obama and Why He Can't Win, the title of a book by conservative commentator Shelby Steele, published on Dec. 4, 2007.
Mr. Steele, meet President-elect Barack Obama.

A good compilation for Forecasters."

Reliance Money Plans to Start Stock Exchange with FTIL

Anil Dhirubhai Ambani Group firm Reliance Money has set its eyes on giving competition to the two premier stock exchanges in the country, viz. Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Reliance Money in collaboration with Financial Technologies India Ltd (FTIL) plans to start its own stock exchange.

Reliance Money has the monetary backing of R-ADAG group; it is also a prominent player in commodity market after picking 10% stake in the National Multi Commodity Exchange (NMCE). The company wants to increase its holding to 26% in near future. Reliance Money’s spot exchange for agriculture commodities is also expected to early 2009. The FTIL group has interests in a currency futures exchange, commodity futures, power exchange and spot exchange for agricultural commodities and plans to set up an exchange for SMEs. It has also set up exchanges overseas.

There is tremendous scope for equity stock exchange in the country that has only 5% of its households investing in equities compared to the global average of around 50%. The equity derivative segment has the biggest scope, with the NSE enjoying a virtual monopoly in the segment with an average daily volume of around Rs 40,000 cr. The spot equity market average turnover doesn’t even match up to half of the NSE derivate average, with the BSE having a daily average volume of Rs 4,000 cr and the NSE having daily average volumes at Rs 10,000 crore in the spot segment.

Any aspirant in the stock exchange segment will however need approval from the Reserve Bank of India (RBI). For FTIL, the equity exchange would be an extension of MCX-SX, its currency trading exchange, which was launched under a subsidiary. Reliance Money will have to set up a new company. Another issue could be equity holding, SEBI has recently decided to allow a single shareholder to hold a maximum of 15% in stock exchanges, but has not notified this yet. The aspirant companies’ track record will also be key factor in getting regulatory approval. If approved, this will be the first stock exchange after 1994, when the NSE was set up

Even though both sources have not confirmed the development, both are eyeing the possibility of an exchange for small and medium-sized (SME) enterprises, an area which is beleaguered with several failed attempts. Earlier ventures such as the Indo Next under the BSE trading platform, Over the Counter Exchange of India (OTCEI) and Inter-Connected Stock Exchange of India had failed to take off.

Worldwide SME exchanges are flourishing. LSE's Alternative Investment Market (AIM) was established in 1995 to nourish young entrepreneurial British firms. AIM is home to over 1,500 firms of which close to 250 are listings of firms based outside Britain. Obviously, one of the attractions for overseas firms is the laidback regulatory regime.

Government to Relax ECB Norms

At a time when funding has become increasingly difficult for corporates across the globe for expanding capacity and growing businesses, since global economic slowdown made the lenders apprehensive of funding projects. The government is expected to relax norms, as early as next week, to make it easier for domestic companies to raise money through External Commercial Borrowings (ECBs), in a bid to boost a slowing economy,

Among measures recommended by the committee of secretaries include, permitting realty firms to tap ECBs, relaxing borrowing norms for non-banking finance companies (NBFCs), increasing the ECB limit 50 per cent to $750 mn under the automatic route (without RBI’s approval and raising the price ceiling at which overseas loans can be raised.

At present, real estate firms are not allowed to tap the ECB route and NBFCs are allowed to borrow within guidelines specified by the Reserve Bank of India (RBI). For the real estate sector, norms could be relaxed only for integrated township projects, realty firms were demanding infrastructure status for real estate apart from using ECB proceeds without restriction.

Earlier in the year in October, the government had permitted companies to use the ECB route up to $500 mn per financial year for rupee expenditure under the automatic route (see table). In addition, the India Infrastructure Finance Company Ltd (IIFCL) was allowed to raise Rs 10,000 cr of tax-free bonds and function as a refinancer for the sector.

Project awards by authorities such as the National Highways Authority of India have come to a virtual standstill because of, among other things, concerns over the viability of projects and high interest rates. Meanwhile, the government has decided to revise upwards cost estimates of 60 highway projects worth Rs 70,000 cr by up to 20%, to help road developers borrow more funds and boost road building activity across the country

The government is also expected to relax the pricing allowed for borrowing foreign exchange loans by raising the spread or premium charged over the international interest rate benchmark, the London Interbank offered rate (Libor). At present, a company cannot pay more than 300 bps over Libor on loans for three to five years and not more than 500 bps over Libor for loans above five years.

FICCI demands additional stimulus, fiscal package, criticizes US move for duty cuts

The Federation of Indian Chambers of Commerce and Industry (FICCI) asked the central government for more fiscal measures to tackle the current economic downturn, along with demanding more rate cuts from the Reserve Bank of India (RBI) to ease liquidity crisis and reduce cost of borrowing. The fiscal relief asked include, cutting the Cash Reserve Ratio (CRR) further to 4.5%, Repo Rate to 5%, Reverse Repo Rate to 4% and Statutory Liquidity Ratio (SLR) to 22% along with the all important reduction in bank interest rate by 100 bps.

Growth stimulus is now very important according to the industry body, especially with the slow down happening in the domestic economy, and inflation worries subsiding. The industry body has also asked for further rate cuts in home loans, re-imposition of countervailing duty and higher import levies.

For the housing sector the association has sought to raise the upper limit of loans to Rs 50 lakh in the existing Rs 5-20 lakh slab lower rates of interest of 9.25%, besides cutting the rates to 6-7% from 8.5% for home loans below Rs 5 lakh.
For the domestic steel industry, the association has asked for restoration of countervailing duty on imported steel items along with raising import duty to 15 % from the existing 5% to "prevent dumping" of cheaper products in India.

For the textile sector, the chamber asked for deferment of 8th quarterly installments of principal amounts on loans taken by the industry, besides asking for restoration of drawback rates that prevailed before reduction in September 2008.

Earlier this week, FICCI had sharply criticized the US’s move to seek zero duty commitments on sectors such as chemicals from India and other developing countries. The association further said that US-based National Association of Manufacturers (NAM), which has been consistently pressing for sectorals, has recently stated that WTO Ministerial Meeting must await consensus on sectoral agreements.

Sectoral talks relate to complete slashing of import duties in 14 identified industrial sectors. These cuts are additional to the proposed formula-based import duty cuts that every country will have to undertake, if the Doha deal is inked. Indian industry is wary of pressure by the US to make sectoral talks mandatory, as it could mean slashing of import duty on key sectors, including chemicals, industrial machinery as well as electrical and electronic goods. This would mean that cheap goods from abroad could flood the domestic market, causing problem to the Indian industry.

PSB hail Home Loan Package, Industry Disagree & Consumers Wait-n-Watch!!

After weeks of speculation and months of wait, a hint of hope has emerged for borrowers. In a coordinated effort, public sector banks (PSBs) put a cap on interest rate charged on fresh home loans of up to Rs.5,00,000 at 8.50% from December 16 and announce a slew of measures to stimulate credit delivery to housing and micro, small and medium enterprises sector. PSBs expect to give loans worth around Rs15,000-20,000 cr under this package. Among major other measures initiated:

· Time Frame - The special home loan package would be applicable for new loans sanctioned up to June 30, 2009
· Switch Facility - Loans up to Rs.5,00,000 will be offered at a fixed rate of 8.50% for five years after which the borrower can switch to a floating rate without paying any charge
· Loan size between Rs 5-20 lakhs - PSBs will also not charge more than 9.25% on home loans of Rs.5 lakh-20 lakh having tenure of up to 20 years
· Processing fee - Banks will not to charge any processing fees and pre-payment charges for loans up to Rs.20 lakh, and would also provide free insurance cover
· Industrial rate cuts - for micro industries, PSBs have reduced loan rates by 100 bps, while for small industries, they have reduced loan rates by 50 bps, and set up cells to redress grievances regarding these loans

The Indian Banks Association (IBA) has justified the threshold of Rs.20 lakh for interest rate relief announced for home loan borrowers, saying that the package will take care of housing requirements of the common man. However industry body Assocham has termed the home loans package by PSBs as highly inadequate, demanding that the government peg the interest rate on housing loans up to Rs.30 lakh at 6% and at 8.5% for loans above this amount. Among other negatives for the measure is that, that existing borrowers from private sector banks will not be able to transfer their loans to PSBs.

After the move from PSBs, all eyes are also on private sector banks, especially the larger ones such as HDFC, Axis and ICICI to follow suit. Until that time, its wait and watch for consumers.

Who Will Save Large US Banks?

The US banking giant, Citibank, is once again toying with the ideas of acquiring banks though it’s domestic regional banks now. But with large number of banks still on the FDIC’s list of bank with riskier assets and monthly new additions to the failed banks list (Security Pacific and Franklin Bank, this month), consolidation in the US banking sector has become a needless exercise.

As the US economy scenario is expected to deteriorate further, the number of banks going bust is likely go to higher. A large number of these failed banks are likely to be acquired by big US banks, some of the directive of treasury. This is bound to add more trouble to the large banks, which are already facing credit crisis. The imminent question is- what would happen when these large banks would be on brink of bankruptcy? Will government let them fall?

No. the government already has minor stake in several leading banking firms but this would not their reason for the survival. The US government has put some legislation that almost guarantees the survival of such large firms and puts the “onus” of safeguarding and protecting such organizations on the government. In 1999, Gramm-Leach-Billey (GLB) Act aka Financial Services Modernisation Act was passed that repealed key parts of Glass-Steagall Act. Section 108 of GLB Act states that “Use of subordinated debt to protect the financial system and deposit funds from ‘Too big to fail’ institutions.”

At this moment it is not clear if federal government is pushing large banks to acquire smaller ones knowing that ultimately they would have to save them, or it is these large banks which interested in creating “too big to fail” institutions.

R-ADAG looks to buy AIG’s life insurance business in Asia

R-ADAG has set its eyes on acquiring the life insurance business of AIG in Asia (ex-India); this comes close after Group Company Reliance Money acquiring 15% stake in Hong Kong Mercantile Exchange, which came on the back of a partnership with local firm Goldride Securities, for distributing financial products and services. Rumors have it that Citibank, acting on behalf of AIA, has approached ADAG to buy out AIA. ADAG is likely to be one of several bidders looking to buy these AIG businesses The AIG deal if goes through, could well be the second-largest overseas buyout by an Indian firm pegged at an asking price of around $10 bn, ADAG however is valuing between $5-6 bn. This deal would also make Reliance the largest life insurer in South-East Asia.

AIG has been going through tough times in recent times, last month, the US nationalised AIG, which was on the brink of collapse by acquiring 80% in the insurance giant with an $85 bn loan and restructured its top management. AIG, which had assets in excess of $1 trillion in 2007, has been looking to sell parts of its businesses and assets and focus on the core general insurance business. Globally, AIG operates majorly as AIA while in some markets like Australia and New Zealand, it functions as AIG. AIG’s move to sell AIA is at variance with its earlier statement to retain a continuing ownership interest in its foreign life insurance operations. Life insurance and retirement services business is the largest revenue generator for AIG. Out of the total revenues of $110 b in 2007, life insurance generated $53.6 bon and general insurance $51.7 bn. Asset management and other financial services are comparatively smaller business areas of AIG globally.

Meanwhile R-ADAG already has a life insurance company venture in India, viz Reliance Life Insurance. It is an associate company of Reliance Capital, the flagship financial services firm of the group, which has interests in asset management, stock broking, insurance, proprietary investments, private equity and other activities in financial services. In India, AIG has a 24:76 life insurance JV. This business is unlikely to be part of the proposed deal with Reliance-ADAG, as the Tatas may have a right of first refusal in any sale by AIG.

Is P-Notes revision aimed at Realty stocks and Politico’s investment confidence?

P-Notes are back. After government cracked down on P-Notes last year to tame the bull-run, now government has revised it guidelines to enable foreign institutional investors to issue Participatory Notes where underlying asset is derivative. SEBI has also struck down the rule which limited the FIIs capacity to issue P-Notes only up to 40% of the value of assets held by a foreign fund.

Is the present move by government to remove restrictions on P-Notes aimed largely at Realty companies? Realty stock index on BSE has declined by 77% since the beginning of the year. It is the biggest decline amongst the sectoral indices on BSE. Last year’s favourite sectors i.e. Realty, Banks and Metals and Capital Goods all have been thrashed in the market this year.

Realty stocks gained prominence in last two years when large number of companies came out with IPOs and soon they were reports of politicians and their families having stakes in these real estate companies. Also, a number of politicians parked their money through hawala channels, which entered the market through P-Notes. Ever since the restrictions were imposed on Realty index has continued to slide. Financial crisis in the US took the shine off from FII and Hedge Funds, which had invested heavily in the real estate companies. P-Notes restriction took the toll of real estate stocks and they started falling like house of cards.

As the politicians lost most of their investments in stock market and the value of their real estate stocks came down to one-third of the investments, the government suddenly felt the need to bring back P-Notes, which it had describes as ‘Hot Money’ that created volatility in the markets. The much despised instrument, which was blamed for the skewed investment trend, is now the rescue measure to resurrect the market in same old way that had led to irrational exuberance in the market. Every one in the government is gung-ho that it will restore the “investors’ confidence”, it is really matter of concern for the individual investors that which ‘Investor’s’ confidence government wants to restore now.

Indian Govt relaxes ECB norms for Infrastructure Companies

India’s Finance Ministry has raised the External Commercial Borrowings (ECB) limit to USD 500mn from present level of USD 100mn for companies engaged in building roads, ports, power plants, telecommunications and other infrastructure related activities. Government has also raised the minimum average maturity to seven years for all such borrowing above USD 100mn, which will have to be spend in India.

This is the second instance of special revision of ECB norms for infrastructure sector. Earlier, in May government allowed infrastructure companies to borrow USD 100mn for rupee expenditure. This has been done in urgent to help the infrastructure companies in raising capital for the project.

Last year, USD 22bn was raised through ECB and foreign convertible bonds and this fiscal year it is expected to fall to USD 16bn. In first quarter inflows through this route fell by 42% to USD 4.1bn. this has given jitters to the government, which is worried that such drastic decline will take toll of infrastructure related projects in the country.

Goldman Sachs, Macquarie Research rule out rate hike by RBI, expects interest rates to ease in early 2009

Goldman Sachs in its latest report has ruled out any hike in interest rate by the RBI, considering the current tightness in liquidity condition and expected decline in the inflation by early 2009. As per the report, the current tight liquidity and slow growth, suggests that the RBI may use the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR) to ease liquidity, hence any further hike by CRR is also ruled out. Further the investment major expects the RBI to have a rate cut in the January-March quarter of 2009, to spruce up growth, as the macro concern shifts from high inflation to falling growth. As per the report inflation is expected to drop considerably in early-2009, due to slowing demand and drop in commodity prices.

Macquarie research too expects the RBI to hold interest rate steady at present level at its next policy review on October 24. Macquarie also expects the RBI to cut interest rates in 2009 and the CRR for banks by around 200 bps. Earlier, Macquarie had earlier forecasted a 25 bps hike in the repo rate to 9.25%, but it had revised its forecast due to the global financial problems.

Will commodities cool-off as Indian markets go bottom fishing?

The Indian markets are again in the mode of bottom-fishing, FIIs, predominantly i-banks and hedge funds are in process of liquidating their portfolios to keep themselves alive with cash flows. This new round of sell-off is more likely to impact the companies which makeup the portfolio of those US firms which are now in trouble with their financial exposure.

The present eruption of year long financial crisis has casted a bigger shadow not only on the Indian markets but also on the companies. The fresh bout is expected to impact US investment banks’ investments in corporate India, which sooner or later will be liquidated. Though people are expect such liquidation from Merrill Lynch and Lehman but the fact remains that Citigroup for long (since last year) has been contemplating selling its stake in HDFC. It implies that India will see more stake sale by big US banks, though most of it may not come to the market, but will definitely impact the markets.

But, the good new may come from the commodity side, which since last year has risen tremendously on back of speculation. Now that interest rates are high, credit is further going to be squeezed out of the market and economic cycle on downhill is going to reduce the demand, speculators would prefer booking their profits and leave the markets for sometime. Commodities, especially the energy related, will see some cool-off now. This may come as good news for India, which is fighting high crude and steel prices.

M&A deal Activity reaches $23 bn; India lags behind China and Hong-Kong

The Merger and Acquisition activity in Asia this year has remain a bit subdued. This year between Jan and Aug, $23.8 bn worth of M&A deals has taken place in India. This is not good for India as during last year and in the same period, deals worth $40 bn had taken place. The number of deals has remained more or less same which implies that the average deal size has fallen, which is not good for the country.

Last year two countries had M&A deals over $40 bn between Jan and Aug and India was one of these two countries. This year only one country has crossed $40 bn mark during the same period and it’s China, with $63.3 bn worth of M&A deals. What’s more intriguing that second place in M&A deal activity in Asia has been taken over by Hong- Kong with deals worth $33.7 bn, in all it is china which has gained in the M&A activity in Asian region.

Amongst the biggest M&A deals which took place in August as per Businessworld, the $113 mn acquisition of Indu projects by Credit Suisse Group was the sole Indian deal amongst all top deals in Asia.

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.

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.