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.

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.

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.