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September 2011, Volume: 27 ISSUE VOLUME Investeurs Chronicles News …… In Focus Cover Story ....... News on Industry and Inflation Hurting Rich Banking Licenses - Entry with Emerging Markets Riders Open Forum……. Stats Watch ....... Outlook Sports in Dire Need of a Real Sector wise GDP growth Coal “Game Changer” rate
Figure Facts Call Rates as on 9 thSeptember 2011Forex 6.30% - 8.25%Forward Rates against INR as on 9thSeptember , 2011 Spot Rate 1 mth 3 mth 6 mthUS 46.58 46.79 47.1 47.45Euro 64.27 64.55 64.96 65.44Sterling 74.17 74.49 74.94 75.43Yen 59.94 60.24 60.69 61.22 5059.4Swiss 52.91 53.21 53.66 54.22 5Franc 16866.Source: Hindu BusinessLine 97 16416.Libor Rates 33Libor % 1 mth 3 mth 6 mth 12 mth 4919.6US 0.22 0.33 0.50 0.82 Sensex NiftyEuro 1.28 1.47 1.68 2.03Sterling 0.66 0.90 1.19 1.66Yen 0.14 0.19 0.33 0.55Swiss Franc 0.02 0.007 0.05 0.29Forward Cover 28274 66097 1 mth 3 mth 6 mthUS 5.49% 4.53% 3.79%Euro 5.30% 4.35% 3.69%Sterling 5.25% 4.21% 3.44%Yen 6.09% 5.07% 4.33% 27115 27207 61153Swiss Franc 6.90% 5.75% 5.02%as on 9 th September, 2011 Source: Hindu BusinessLine Gold SilverCommoditiesAluminum (1 kg) 108.75Copper (1 Kg) 419.25 46.384Zinc (1 kg) 101.25 3Steel (1000kg) 30800 114.22 45.870As on 9th September 2011 112.46 8 Crude Oil ($) Dollar Data from 29th August to 9th September
StatsWatch YEAR Outlook -Coal Coal India produces around 4 million ton coking coal annually and imports around 92 million ton coal annually. Of the total import, around 28 million is coking coal and the rest 64 million ton is thermal coking coal. As per The Planning Commission forecast, coal shortage in India will soar to 200 million ton by the end of the 12th Plan (2012-17), with a demand of 1,000 million ton against production of 800 million ton. Coal imports are rising at a fast pace, already contributing to over 10% of our coal consumption. Next year, the shortage is expected to be around 142 million ton with availability of 554 million ton against a requirement of 696 million ton. However, demand for Coking coal is likely to come down in the near future, since, steel industry which happens to be one of the largest customers of coal is struggling with its inability to pass on any hike in raw material to its client base. On the global front, demand for coal is projected to take a hit on account ofGloss decreased economic activities around the world and resumption of supplies from the flood affected Queensland region in Australia. “Capitalization” According to market dynamics, weaker demand will obviously put a pressure onTotal amount of the various securities issued by a corporation. coking coal suppliers to bring down prices. A correction in price is imminent. It hasCapitalization may include bonds, debentures, preferred and common gone up from $225 per ton to $330 per ton over a period of six months, up to Maystock, and surplus. 2011. Coking coal prices are expected to decline as logistics issues are sortedBonds and debentures are usually carried on the books of the issuing gradually in the Queensland region, bringing respite to steel, cement and powercompany in terms of their par or face value. Preferred and common companies. The market expectation is that coking coal price is likely to depreciate byshares may be carried in terms of par or stated value. $30-$40 per ton but there may be a drop of $10 per ton on thermal coal. A drop in global commodity prices and softening of crude oil coupled with a sluggish demand from Japan are likely to have a cooling effect on coal prices.
Banking Licenses - Entry with Riders Cover StoryIntroductionThe Reserve Bank (RBI), on August 29, came out with draft guidelines for issuing newbanking licenses in the private sector. The guidelines cover a number of issues, includingpromoter eligibility, corporate structure, capital requirement, foreign shareholding and thebusiness model for entities keen to enter the banking sector. It has laid down tough groundrules for issuing new banking licenses, making it clear that it would be looking to cherrypick industrial houses with squeaky clean reputations, diversified ownership, and withlittle or no exposure to the real estate and broking businesses.Once RBI receives the applications, these would be screened to ensure the eligibilitycriteria are met. At the same time, the central bank would impose additional conditions todetermine the suitability of the applications. Further, those wanting to set up a bank willhave to first establish a wholly owned Non-Operative Holding Company, which will holdthe bank as well as all other financial services companies. This has been done to “ringfence’’ the regulated financial services activities of the group, including the new bank, fromthe other activities of the promoter group.After screening the applicants, the applications would be sent to a high-level advisorycommittee comprising eminent personalities from both within and outside the financialsector. Though the advisory committee would submit its recommendations to RBI forconsideration, it is the banking regulator which would take the final call.To ensure transparency, names of all the applicants would be put up on the RBI website.The bank would have to be set up within a year of granting the in-principle approval. RBIwould reserve the right to withdraw the in-principle approval if there is any evidence ofself-dealing.
HistoryWhat prompted the RBI and government to consider issuing banking licenses to the private sector? The idea was first mooted in the 2010 -11 Budget Speech by FinanceMinister, which said that the objective was to expand the geographical coverage of banks and access to banking services.In 1951, when India embarked on the process of planned development, there were 566 private commercial banks, many of which had their origins in industrial houses.Indias industrial houses have in the past run banks, or worked in close association with banks. These banks, however, concentrated their operations in urban areas andlargely catered to the upper sections of the society. No wonder then that RBI in its discussion paper on ‘Entry of New Banks in the Private Sector, has emphasizedpromotion of financial inclusion as the objective for granting new licenses.Detailed guidelinesThough most of the guidelines are on the expected lines, the big surprise was the decision to put broking outfits on the negative list along with real estate barons. RBIbelieves that certain activities such as real estate and dealings in capital market, particularly broking activities, were riskier and represent a business model and culturewhich are misaligned with a banking model. A number of non-banking finance companies — which have been salivating at the prospect of turning into full-fledged banks —may find their chances of grabbing one of the licenses at stake scampered by this provision since they all have broking arms.But that wasn’t the only surprise. The draft guidelines also said promoters or groups with diversified ownership would be eligible to promote banks. However, theRBI did not explain what it meant by diversified ownership.
But the real jolter is the provision that entitles the RBI to run a detailed Assuming that the margin for FI business is currently zero and equal split in FI andbackground check on the applicants with other regulators and enforcement and other business and a conservative 200 basis points margin for other business, theinvestigative agencies such as the income tax department, the CBI or the overall margin for a new bank will be approximately 100/120 basis points. Hence,Enforcement Directorate. Several industrial houses and top-tier companies have business viability of such a model seems to be challenged, at least on papers!been sucked into controversial investigations into their commercial transactions, Another seemingly uphill task is two-year compulsory listing clause for aspirantsdeals and tax enquiries that have eventually landed in courts. This can become the (while listing is not mandatory for the existing players), along with minimum 12%biggest litmus test that the banking license hopefuls will need to pass. capital adequacy requirement for a bank in its first three years of operations against 9% CAR for existing banks. These obligations will drive up cost of funds, and thus costBone of Contention of lending.Industry has welcomed draft guidelines with a cheer, but, there are some Add operating costs and technology investments above obligations and end result isapprehensions associated with the emphasis on financial inclusion in the present higher time taken by banks to break even. Another aspect is the source and cost ofdraft. Apparently, draft guidelines put new banks at disadvantageous position as funds, the new banks will face multiple challenges in sourcing low-cost depositscompared to private banks which got the license earlier, as new banks will have to and will definitely have a higher cost of funds than the existing public sector andmodel their business so as to address financial inclusion. This will drive up the cost private banks.for new banks, as branches in these regions will take longer to turn profitable.Also, new banks would have to meet the priority sector targets and sub-targets However, entire picture is not gloomy. The technology cost has come down sharplywhich will drive up the cost in the initial stage without supporting revenues. New and these new players will not have any legacy issues like existing banks.banks would also have to open at least one in four branches in rural areas with apopulation of no more than 9,999. Conclusion The domestic banking system is dominated by 26 state-run lenders with a 75% shareThis appears as a major bone of contention, given previous experience of Banks of total assets, while 21 private banks account for about 20%-22% of assets and thewith financial inclusion drive. Banks have been working towards FI for the last five rest is split among 34 foreign banks. Still, about half of the total 1.2 bn population ofyears or so. As on March 2011, a sample of 19 large andsmall sized domestic banks India has no access to banking services, while several corporate houses are keen to sethad an average of Rs. 600 crorecredit outstanding for FI accounts.More up banks. Intuitively, then providing them with banking license looks a logical solution.importantly, of the total FI accounts opened, only 40% were found to be active forthe last one year.Also, given the challenge that domestic banks would have had a With these big corporate already providing most of the banking services through theirhead-start on FI initiatives, reaching the next delta of FI customer would become NBFC subsidiary it may be easier for them to switch gear operationally, but meetingthat much more difficult for the new banks. the shareholding norms, financial inclusion responsibilities and other restrictions on holding companies exposure may be a stumbling block.
LIC Housing Finance launches teaser home loan Maharashtra ends zero cross-subsidy surcharge scheme regime Mortgage Company LIC Housing Finance joined the Maharashtra’s power sector will undergo a major shift, teaser home loan bandwagon by introducing New as the state power regulator has ordered an end of theCAG Report: RIL notified KGD6 discoveries without zero cross-subsidy surcharge (CCS) regime introduced Advantage 5, under which the interest rate woulddetails, Air India has accumulated debt of Rs in 2006 for open-access transactions.The Maharashtra remain fixed for the first five years.New Advantage 5 is38,000 crore Electricity Regulatory Commission (MERC) said on offered at fixed interest rates for the first five yearsFresh trouble seems to be brewing for the UPA Friday that it had levied CCS ranging from Rs 0.21 per and thereafter at floating rates, LIC Housing Finance unit to Rs 3.97 per unit for high-tension (HT) consumersgovernment, as the Comptroller and Auditor General(CAG) tabled two more high-profile audit reports that said in a statement. The floating rates will be linked to payable to MahaVitaran, Rs 0.26 per unit to Rs 2.79 percould bring attention back to political corruption and the Prime Lending Rate prevailing at the time of the unit payable to RInfra-D and Rs 2.58 per unit to Rs 2.81misdeeds at the highest levels.In its report on RILs KGD6 switch, it said. per unit for TPC-D.The MahaVitaran had argued thatcontract, the CAG stated that the company notified zero CSS would mean that the subsidized category ofdiscoveries without details and declared entire contract Car sales slowdown for second month running consumers would have to share the burden of loss ofarea as discovery area. RIL was found guilty of non- cross-subsidy whenever a consumer — otherwise Fewer buyers drove out of showrooms in new cars forrelinquishment of area. providing cross subsidy through tariff — shifts away the second successive month in August, following the from it and opts for open access, which would not be in central banks serial intervention aimed at easingRBI clears Enam-Axis Bank deal the interest of the larger section of the consumers. demand in the economy to tame inflation. ProductionThe Reserve Bank of India has approved Axis Bank’srevised plan to acquire the broking and investment cuts at two of the bigger carmakers, coupled with high UGC lifts ban on Distance PhDs, MPhil coursesbanking businesses of Enam Securities. This ends nearly fuel prices, compounded the challenge for the auto The University Grants Commission (UGC) has lifted the10 months of uncertainty over the deal.The terms of the industry, dragging down car sales 10%, even as two- two -year-old ban on distance MPhil and PhD courses.earlier proposal were revised following the central bank’s The move comes after widespread protests by various wheelers posted a 16% growth.discomfort with the structure of the deal that entailed universities. Many Open Learning Universities likeAxis Bank offering shares to Enam, while the acquisition IGNOU were protesting the ban on the ground that theirwas done by a subsidiary. While the details of the revised respective laws, passed by Parliament or legislatures,structure were not known, the sources said it would allowed them to offer such courses.remain an all-stock deal.
Emerging Markets Russia : Gazprom Opens Pipeline to Sakhalin Philippines: BSP keeps policy settings after prices Prime Minister Vladimir Putin on 8th September opened easedSouth Africa: Slower growth boosts case for a multibillion-dollar pipeline that could potentially boost THE BangkoSentralngPilipinas (BSP) has decided to holdrate cut natural gas exports from Russia to Asia, including through onto existing policy rates and reserve requirement ratioSouth Africa’s economy grew at its slowest pace in reclusive North Korea.The Gazprom pipeline takes gas amid benign inflationary pressures. In a briefing, BSP Gov.almost two years in the second quarter as the from the Pacific island of Sakhalin to the mainland port AmandoTetangco Jr. said the policy-making Monetarymanufacturing and mining sectors slumped after of Vladivostok. From there it could travel to Japan, China Board decided to keep the overnight borrowing andstrikes, boosting the case for interest rate cuts while and South Korea as the project develops. Initially, there lending rates at 4.50 percent and 6.50 percent, and thedenting the government’s job-creation hopes. will only be enough gas for domestic needs, and it will reserve requirement ratio at 21 percent.The slowdown will make it even harder for the encourage new businesses to appear because energy At the same time, inflation expectations would remainlegions of the country’s unemployed - more than a plants will dramatically increase the use of the fuel firmly anchored given moderating commodity prices andmillion have lost their jobs since 2009 - to find work, and generate cheaper electricity, Putin said. the recent string of stable inflation rates, the central banklikely keeping the unemployment rate above 25%. chief said. Indonesia: BI to oblige forex savings in local banksBrazil Outperformed by Other BRIC Nations Bank Indonesia (BI) is set to issue a new regulation later Malaysia: July IPI down 0.6% on-yr as oil, gasBrazil has been outperformed by the other three this month obliging the savings of foreign exchange from output shrinkBRIC countries, figures for the second quarter of exports and foreign loans - either that of public or private Malaysia’s industrial production index (IPI) decline in July2011 have revealed. From the traditional BRIC institutions - in domestic banks. It could help strengthen 2011, from a year ago and also from June, as oil and gas(Brazil, Russia, India, China) group of emerging Indonesia’s foreign currency liquidity, which has been production output shrank. The Statistics Department saidglobal economies, Brazil grew the least, following hitherto depending on “hot money”.As an impact of the on Sept 9 the IPI in July eased 0.6% from a year ago. Thepoor results from the country’s industrial and new regulation, domestic banks would need banking IPI in June was revised positive 1.3% year-on-year.agricultural sectors. Although China and India products that could manage the funds.traditionally lead the group, Russia’s economy hasbeen buoyed by higher commodity prices in recentmonths, due partly to higher oil prices, leaving Braziltrailing in fourth place.
InFocus Open Forum Inflation Hurting Rich! Sports in Dire Need of a Real “Game Changer”If inflation is hurting common man through high food and fuel costs, the In the aftermath of the recent anti-corruption surge, an important bill that is inrichie-rich club has its own inflation-related worries -- that is in prices of the works, the Sports Development Bill, is simply not getting the attention itChanel bags and Rolex watches among other high-end lifestyle products. deserves. This bill has everything to do with corruption and the unholy nexus between politics and big business. Interestingly this time around, the crusaderThe index, published for the first time, was calculated after taking into who is on a war-footing to fix sports administration in the country is Unionaccount the price change of 20 lifestyle products and services widely used Minister of Sports, Ajay Maken. His opposition is the who-is-who of theby HNWIs over a one-year period ending April 2011. List included wine, country’s business and political elite. SharadPawar sits atop the biggest money-accessories, cigar and club membership in four major cities of Asia- Pacific spinning sport in Indian history -- cricket. His party colleague, Praful Patel,region -- Mumbai, Singapore, Shanghai and Hong Kong. heads the football federation. The MCA is headed by VilasraoDeshmukh, whileThe study by the Swiss banking major Julius Baer found that the rise in the RCA is headed by Transport Minister, C.P. Joshi. The opposition parties arethis Lifestyle Index is in fact much higher than the overall consumer price equally represented in this racket. ArunJaitley of the BJP heads the DCA,inflation of 5.1 per cent for the region in the same period. Prices of high- NarendraModi heads GCA, Farooq Abdullah heads the JKCA, LaluYadav headsend lifestyle products have risen by 11.7 per cent in Asia-Pacific region, the BCA, then there is Manohar Joshi and Rajiv Shukla, among others, who playincluding India, in the past one year. dual roles as politicians and cricket administrators.All said and done, rich are definitely living an expensive life! Next, all the business houses in the country have a piece of the cricketing action --MukeshAmbani (Mumbai Indians), Vijay Mallya (Royal Challengers), Subrata Roy (Pune Warriors), N. Srinivasan (Chennai Super Kings and BCCI President), to name a few. Then, of course, you have the Bollywood stars who double as team owners like PreityZinta (KXIP) and Shahrukh Khan (KKR), to name a few. This is just a shortlist of the rich and powerful with strong ties to cricket. If you dig deeper, every single sport in India has strong ties to politics and business in some form or shape. There is absolutely nothing wrong with this
except for the fact that there is no transparency whatsoever in the running of In a recent comment, Maken said, "Had this bill been enacted earlier, theall these sports organizations. Thus, they serve as perfect breeding grounds for CWG scam would not have taken place. Had this bill been in place, most ofcorruption, nepotism, cronyism, and favoritism, among other ills. The BCCI, the the accused in the CWG scam would not have been office-bearers in therichest sports organization in the country, is run like a private club where Indian Olympic Association. If we dont want such scams in the future, wepoliticians and industrialists make their own rules and run their own show should enact this bill." This, in itself, should be a reason to treat this billwith no kind of accountability or oversight whatsoever. The BCCI crushed the seriously and give him all the support we possibly can.ICL by launching the IPL and banning the ICL players. Was justice served? In another interesting development, the infamous LalitModi, who fell outWhat came of the IPL investigations? How exactly are national teams selected? with his buddies in the BCCI, now backs the BCCI in this struggle. Clearly,What policies and procedures does the BCCI follow when allotting TV rights? Modi would rather battle the BCCI behind closed doors than face an openFor many years, the country’s cricketing business was JagmohanDalmiya’s and transparent investigation. This is yet another reason why this bill ispersonal fiefdom. Now it’s the rule of the Pawarempire, while Dalmiya is absolutely essential.relegated to the cricketing kingdom in PaschimBanga. No matter who rules, the It is anybody’s guess as to how far Maken might be successful in making thisBCCI gets to pick players to represent the country, enjoy extensive taxpayer bill a reality. After the initial cabinet meeting, the draft of the bill wassubsidies, discretely dole out handsome contracts to the likes of Gavaskar and rejected as expected. With no one of the likes of Team Anna to carry hisShastri and insist that the media select them as commentators, etc., among battle to the streets, a watered down bill, a change of ministries for Maken,other outrageous acts. or a bill that languishes as parliamentary roadkill seems to be the likelyAjay Maken deserves utmost appreciation for taking on this powerful group in outcome.one sweep with this bill. As expected, opponents of the bill complain about This bill is another opportunity for the UPA to demonstrate its commitment“Government intervention”, “Government control”, “independence of sports” to reform and transparency. Rahul Gandhi arrived late for the anti-etc. The bill proposes some much needed changes such as bringing these corruption party, yet proclaimed himself to be the game changer. If theresports bodies under RTI, having a Lokayuktha to investigate complaints in a was ever a need for a real game changer, it is now, in order to save thetimely manner, and limiting the sports administrators, quotas for national sports bill.sportspersons in administration, and age limits for administrators, amongother changes. By defining someground rules, these changes aim to enforce I am reminded of my PT teacher in school, who might have said, “Hey! Gametransparency and accountability and pave the way for professionalism in the changer, step forward, I say.”system, as opposed to a “Pawar-Raj” or a “Dalmiya-Raj”. Source: Economic Times
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