Current Economic Statistics and Review For the Week Ended September 15

Securitisation is the creation and issuance of debt securities, or bonds, whose payments of principal and interest are derived from cash flows generated by separate pools of assets. Financial institutions and businesses of all kinds use securitisation to immediately realize the value of a cash-producing asset. These are typically financial assets such as loans, but they can also be trade or leases receivables. In most cases, the originator of the asset anticipates a regular stream of payments, by pooling such assets together, these payment streams can be used to support interest and principal payments on debt securities. In its simplest form a securitisation involves (1) creation of a Special Purpose Vehicle (SPV) to hold title to assets underlying securities; (2) the originator or holder of assets sell the assets (existing or future) to the SPV; (3) the SPV raise funds, with the help of an arranger / investment banker, by issuing securities which are placed with investors; and (4) the SPV pays the originator for the assets with the proceeds from the sale of securities. When assets are securitised, the originator receives the payment stream as a lump sum rather than spread out over time. Securitised mortgages are known as mortgage-backed securities (MBS), while securitised assets—non-mortgage loans or assets with expected payment streams—are known as asset-backed securities (ABS).

The earliest securitised transactions dates back to the early 1970s in the U.S.A. , wherein the pooled mortgage loans were sold by the government-sponsored enterprises- Government National Mortgage Association (Ginnie Mae). These transactions were followed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae). The primary objective of establishing these government sponsored agencies was to facilitate home ownership by providing a reliable supply of home mortgage finance.

Following mortgage-backed securities (MBS), the next major development in securitisation, was the introduction of asset-backed securities (ABS) in 1985 when the Sperry Lease Finance Corporation created securities backed by its computer equipment lease. In case of Sperry, the cash flow came from payments made by the lessess. Since then, the market has grown and evolved to include the securitisation of a variety of asset types, including auto loans, credit card receivables, home equity loans, manufactured housing loans, students loans and even future entertainment loyalties.

There are a number of varieties of securitisation and a number of different structures. However, there is a common theme to all of MBS and ABSs transactions, which is illustrated in the following Chart:

· The transaction begins when an Originator, initiates the contracts which give rise to the cash flows that are securitised. These include banks, thrift institutions, credit card companies and other types of loans and financing companies. Originators often retain a connection to their asset following securitisation by acting as servicer- the agent collecting regular loan or lease payments and forwarding them to special purpose vehicle (SPV).

· Once a suitably large portfolio of assets has been originated, the assets are analysed as a portfolio, and then sold or assigned to a third party which is normally a SPV formed for the specific purpose of funding the assets. The SPV can either be a trust, corporation or form of partnership set up specifically to purchase the originator’s asset and act as a conduit for the payment flows.

· The innovative part of the securitisation is the ability of the originator to move asset off-balance sheet; this is usually done by transferring the asset to SPV. The transfer to the SPV may be a ‘true sale’, in which case all rights to the asset are transferred to the SPV, with the originator retaining no residual interest. If the transfer is not a true sale, investors are vulnerable to claims against the originator of the assets.

· SPV issues “tradeable” securities to the investors to fund the purchase of assets. The SPV then remits all or part of the proceeds to the originators. Since the securities issued by SPVs are usually structured to appeal to various classes of investors in many cases there are several tranches each with specific characteristics attractive to different segment of the market.

· Depending on the nature of the transaction and type of assets, the securitisation pool may need support or credit enhancement to attract investors. This can come from the assets themselves or from an external source. An example of internal credit enhancement is over-collateralisation; subordination of one or more tranche of the securities issued is an another common form of internal credit enhancement. External credit enhancements can include surety bonds, parental guarantees and letters of credit from financial institutions such as banks and insurers.

· Investors purchases the securities and SPV agrees to pay any surplus which arises during its funding of the assets back to the originator, thereby allowing the originator to retain its existing relationships with the borrowers and as the cash flows arise on the assets, these are used by the SPV to repay the funds to the investors of the securities.

Securitisation offers a number of advantages to the originators and to the investors. From the originator’s perspective, securitisation provides benefits such as:

1. the receivables are moved “off balance sheet” and replaced by cash equivalent, thus improving the originator’s liquidity , and balance sheet;

2. the originator does not have wait till it receives payment of the receivables to obtain funds to continue its business and generate new receivables. This is more significant when the receivables are relatively long term, such as with real property mortgages, auto loans, student loans, etc.,

3. Securitisation lowers the firm’s financing costs since the securities issued in the securitisation are more highly rated by rating agencies. This results into a lower interest rate for the originator, as investors do not demand the same risk premium.

4. Better assets liability management by reducing market risks resulting from interest rates mismatches.

From the investor’s perspective, the securitisation provides for benefits such as:

1. Creation of new classes of securities that appeal to investors with different appetite for risk.

2. Securitisation reduces investor’s transaction costs and improves portfolio efficiency by enabling them to take only those components of a particular asset’s cash flow that accords to their preferences.

3. It adds value to investor’s portfolio by facilitating the acquisition of specialised investment information. By structuring an assets backed transaction into tranches with varying degrees of informational complexity, it allows investors with relatively low levels of expertise to take positions in the more superior securities offered by SPV, thereby adding value to their portfolio.

Securitisation has grown from a non–existent industry in 1970 to one of the dominant means of global financing, particularly in the US, Canada, Europe, Latin America and South–East Asia. Each year billions of dollars of securitisation are structured for a variety of assets such as credit card receivables, airline tickets, residential mortgages, car loans, swap contracts, trade and export receivables, oil and gas receivables, insurance premia, telephone receivables, parking fines, cinema tickets, hire purchase / lease receivables, and trade receivables. Thus illustrates the extensive range of assets that can be securitised. The U.S.A. securitisation market is the largest in the world with approximately more than 75 per cent of the global volumes in securitisation originating from the U.S.A. Not only this, but securitisation issues originating from the other countries, Japan, Europe and some of the emerging markets, draw investors from the U.S.A. As per the Thomson Financial League Tables, US issuance stood at $729 billion in 2004 as compered with $586 billion in the year 2001.The U.S.A. continues to dominate the world securitisation market both in terms of depth as well as width. In terms of depth, it draws participants from both institutional as well as individual investors, while in terms of width, the US market has more applications of securitisation than any other market.

Securitisation in India has been existing since early 1990s though essentially as a device of bilateral acquisitions of portfolios of finance companies. The first securitisation deal took place in 1991 when the Citibank raised Rs. 16 crore from GIC Mutual Fund by securitising some of its auto loans. In the later part of 1990s, creation of transferable securities in the form of pass- through certificates (PTCs) become common. A typical Indian PTC does not abide by any specific structural features – there are PTCs having different payback period, there are structured PTCs, PTCs having a specific coupon rate, etc. The issuance of PTC has almost become synonymous with the market that even for completely bilateral deals, which are literally a direct assignment, people have used PTCs.

Securitisation of auto loans was the mainstay of the Indian securitisation market through most of the 1990s.However,, since 2000 the residential mortgage backed securities as well as securitisation of futures receivables have started gaining more popularity. Many organisations like banks, power generators, NBFCs, petroleum companies and refineries, housing finance companies have in general started exploring the possibilities of raising finance through the securitisation method,thereby fuelling the market growth.

With the changing financial environment and the requirements of the corporates, in the Union Budget, the Finance Minister in order to widen and boost the securitisation market in India, appointed a high level Expert Committee on Corporate bonds and Securitisation that would look into the legal, regulatory, tax and market design issues in the development of corporate bond market. Under the Chairmanship of Dr. R. H. Patil, recently, on January 29, the Committee came out with host of proposals to fuel the growth of securitisation market in India . Some of its major recommendations are stated below:

In 2002,The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) was enacted. Though presented as a securitisation–related law, in commercial practice it has been very irrelevant for securitisation transaction and has been viewed as a law relating to enforcement of security interest. SARFAESI has been used for sale or securitisation of non-performing loans (NPLs) by banks and financial institutions in favour of assets reconstruction companies (ARCs) registered with RBI under SARFAESI.

Most securitisation in India adopts a trust structure–with the underlying assets being transferred by way of a sale to a trustee, who holds it in trust. Although, the trust is not a legal entity, the trustee is entitled to hold property which is distinct from the property of the trustee or other trust properties held by him. Therefore, the trust is the special purpose vehicle (SPV), which issues PTCs.

Among the regulatory costs, stamp duty is a major hurdle. Stamp duty is payable on any instrument which seeks to transfer any rights or receivables, whether by way of assignment or novation or by any other mode. The instrument of transfer attracts stamp duty at an ad volrem rate, ranging between 0.1 per cent to 8 per cent, and this varies from state to state. Thus, the lack of clarity relating tot he stamp duty has in a way shaped the market–players have limited transactions to such receivables as may be transferred without unbearable stamp duty costs. Unfortunately, SARFAESI law, which intended to resolve the stamp duty problem, but owing to its language, did not succeed.

In addition to stamp duty, the instrument must be registered under the Indian Registration Act, 1908, which again imposes additional costs on transaction. Further, the RBI has a set of guidelines for banks relating to their transactions under the SARFAESI law but that contains only an opaque reference to capital relief. There are no clear guidelines on capital relief. However, it is generally felt that if a transaction attains off balance sheet treatment, it will result into capital relief. There are no specific capital implications on account of retention of subordinated tranches, though in practice, there are substantial junior stakes or over-collateralisations present in every transaction.

The Committee recommends that in order to promote healthy growth of securitisation, the central government should consider establishing an appropriate institutional process to evolve a consensus across States on the affordable rates and levels of stamp duty on debt assignment, PTCs, security receipts (SRs).

In order to resolve the uncertainty in taxation issues to securitised paper, the Committee has recommended the following measures:

· The Central Government should provide an explicit tax pass through treatment to securitisation SPVs and NPA Securitisation SPVs (namely, trust SPVs set up by ARCs registered with RBI under SARFAESI) on par with the tax pass through treatment applied under the tax law to Sebi registered Venture Capital Funds under section 10 (23FB) read with section 115U of the Income tax Act. RBI and SEBI may frame appropriate regulations in this regard.

· Sebi should consider the possibility of modifying the Mutual Fund Regulations to permit wholesale investors (to be defined to mean an investor who invests not less than Rs 50 lakh in the scheme) to invest in and hold units of a closed-ended passively managed mutual fund scheme whose sole objective is to invest its funds into PTCs and SRs of the designated MBS SPV Trust/ NPA Securitisation Trust.

· Recognising the wholesale and QIB character of investors in securitisation trusts, there should be no withholding tax requirement on interest paid by the borrowers (whose credit exposures are securitised) to the securitisation trust. Similarly, there should be no requirement of withholding tax on distributions made by the securitisation trust to its PTC and/or SR holders. However, the securitisation trust may be required to file an annual return with the Income-tax Department in which all relevant particulars of the income distributions and the identity of the holders of PTCs and SRs may be included. This will safeguard against any possibility of revenue leakage.

The Institute of Chartered Accountants of India (ICAI) has issued a guideline note on accounting for securitisation, the guidelines issued are recommendatory rather than mandatory. Generally, off balance sheet treatment is allowed, if risks and rewards are transferred. Gains on sales is computed based on the components approach underlying the US accounting standard. Originators are required to estimate the fair value of retained interests and retained liabilities and apportion the carrying value of the asset in proportion of such restrained and transferred interests.

· It is suggested that the Central Government may consider possibility of proposing an appropriate amendment to the definition of “Security Receipt” in Sec.2 (zg) of SARFAESI Act. The amendment should enable the SR to also be an evidence of the right of its holder to the cashflows from realization of the financial asset involved in securitisation (as differentiated from a right in the financial asset itself).

· With a view to deepen the investor base of QIBs which can invest in SRs, it is suggested that large sized NBFCs and non-NBFCs corporate bodies established in India with net own funds in excess of, say, Rs.50crores, may be permitted to invest in SRs as QIBs. Similarly, private equity funds registered with SEBI as venture capital funds may also be permitted to invest in SRs within the limits that are applied for investment by venture capital funds into corporate bonds. These changes could be brought about through appropriate notification by the central government in exercise of its power under Sec.2 (m (iv)) of SARFAESI Act or through notification by SEBI in pursuance of its powers under Sec.2 (u) of SARFAESI Act.

· SEBI should consider the possibility of modifying the Mutual Fund Regulations to permit wholesale investors (to be defined to mean an investor who invests not less than Rs 50 lakh in the scheme) to invest in and hold units of a closed-ended passively managed mutual fund scheme whose sole objective is to invest its funds into PTCs and SRs of the designated MBS SPV Trust/ NPA securitisation Trust. This coupled with the ability of securitisation trust SPVs (whether set up by the securitisation company registered under SARFAESI or otherwise) to issue PTCs and SRs to mutual funds would enable development of a wholesale market for securitised assets outside QIBs.

· The committee has suggested the draft guidelines (dated April 4, 2005) issued by RBI on securitisation of standard assets by banks and FIs need to be reviewed. In those instances where the issuer of securitised paper is also the credit enhancer, the draft RBI guidelines would result in the anomalous situation whereby the issuer needs more capital to securitise his assets than not to securitise his assets. The proposed requirements for capital consumption need to be suitably reduced to avoid this anomaly.

· Credit enhanced Collateralised Loan Obligations (CLOs) and Collateralised Debt Obligations (CDOs) should be included as approved investment avenues. Now, investments in credit enhanced CLOs and CDOs are not recognized instruments for important market participants such as insurance companies and provident funds. Further, these participants are also not allowed to provide credit enhancements for such CLOs and CDOs and thus there is very limited understanding and appetite for such papers. The regulators for such participants, viz. IRDA for insurance companies and EPFO/ pension fund regulator should come out with specific notifications for the same.

· Steps should be taken to introduce credit enhancement in India for corporate bonds. In a securitisation structure such enhancement is already provided with pooling of assets and selling tranches of the pooled asset with different ratings so that the investors can acquire the assets according to their risk preference. Such mechanisms could be extended to bonds issued by SPVs of State governments or other SPVs which are set up for ensuring financing of infrastructure and other riskier activities. The State Government itself or the Central Government or other willing market participants, including bond insurers, could underwrite some of the tranches so as to enhance the credit rating of such tranches. The Infrastructure SPV being mooted by the Ministry of Finance and the Planning Commission could also do the same. These tranches could then be placed out with relatively risk averse long term investors such as provident funds insurance companies etc. provided the concerned regulators allow investments in such securities as per suitable rating and listing criteria.

As per Icra, the issuance of structured finance products grew by 121 per cent in 2004-05 over the previous year. Only asset – backed securities grew by 176 per cent to Rs. 22,300 crore during the year, accounting for 72 per cent of the structured finance. (Table). Moreover, the average deal size in the issuance market has also increased substantially as the number of deals grew by 41 per cent. Meanwhile, the mortgage-backed securities grew by 13 per cent in 2004-05 with around Rs.3, 340 crore worth MBS issuance deals taking place during the year.

Table: Trend in Structured Finance Volumes.
(Rs.Crore)
Type	2001-02	2002-03	2003-04	2004-05
ABS	1290	3640	8090	22290
MBS	80	1480	2960	3340
CDO/LSO	1910	2430	2830	2580
PG	400	190	0	1600
Others	0	40	50	1000
Total	3680	7770	13920	30820
Note: (i) CDO/CLO: Corporate Debt Obligation and Loan Sell-Off (ii) Partial Guarantee Structure.
Source: Report of the Expert Committee on Corporate Bonds and Securitisation

About 64 per cent of the ABS issuance involved multiple tranches of PTCs, each with a different tenure. Time tranching is an effective means of structuring PTCs with different tenures as it helps the issuer address the needs of different investors with different investment horizons. On the other hand, the long tenure of the MBS paper together with the lack of secondary market liquidity has deterred certain investors from investing in MBS

Among the various innovations in financial markets, Securitisation is among the best. It has arrived in a developing country like India much faster than expected. Though the potential of securitisation has been estimated at over a trillion of rupees, the concept has yet to take a wider application so far, due to various reasons stated above. Further, major hindrances in the form of unclear taxation, accounting, legal and regulatory framework have also restricted the market to achieve its full potential. However, with the recent release of the Expert Committee Report as well as RBI guidelines on securitisation it is expected that the legal and taxation issues would be resolved and securitisation will grow to its full potential. There is large untapped market in housing loan portfolios, vehicle loans, credit card receivables, student loans, infrastructure projects, public utilities, tax deferrals etc, which can now be tapped. Further, the government can also use securitisation as a very useful and efficient tool of financing infrastructure projects and generating additional resources for developmental projects.

Baxi Daksha & Vikram Shroff (2000), ‘Securitisation in India ’, Nishith Desai Associates, February 18.

Cummins J. David (2004), ‘Securitization of Life Insurance Assets and Liabilities’ Working Paper submitted to TIAA–CREF Institute, January 3.

GOI (2005), ‘Report of High Level Expert Committee on Corporate Bonds and Securitisation, December 23.

ICRA (2005), ‘Update on Indian Structured Finance Market’ Rating Insight, July.

Timothy C. Lexiner (2004) ‘Securitization of Financial Assets’, from www.vinodkothari.com

Following the Centre’s recent decision to import 5 lakh tonne of wheat to overcome the supply squeeze and spiraling domestic prices, a global tender has been floated by the State Trading Corporation of India (STCI). The tender has sought the wheat crop of the current season (2005-06) from any origin of import in “ loose bulk” form. According to the tender, 1.2 lakh tonne of wheat is scheduled to arrive at Cochin port, 1.1 lakh tonne at Mangalore port, 1 lakh tonne at Chennai and Tuticorin each and the remaining 70,000 tonne at Vishakaptnam. This wheat has been imported duty free and as per the tender conditions, it should be arriving between March and mid-May, 2006. Given the time constraint of 8 weeks, the STCI is unlikely to get a good bargain. The last date for tender is February 20, 2006.

Wheat procurement during 2006-07 rabi marketing season is likely to be at 162 lakh tonne, up by 9.57 per cent over 1487.85 lakh tonne in 2004-05. Punjab is expected to contribute the maximum wheat at 85 lakh tonne to the Central pool, followed by Haryana with 42 lakh tonne and Uttar Pradesh with 25 lakh tonne.

In order to control the rising sugar prices, the Department of Food and Public Distribution has released additional quota of 1.5 lakh tonne of free-sale sugar in the open market for the month of February, leading the total quota released for February to stand at 14.5 lakh tonne, which have to be sold by the end of the month. The unsold free sale sugar during the month, otherwise, would be converted into levy sugar. The department has also decided to increase the quota for the month of March from 12.5 lakh tonne to 14 lakh tonne.

In the backdrop of reports of suicides by farmers in some parts of the country, the Centre has decided to pump in Rs 13,000 crore to cooperatives as a part of reforming the institutional credit in rural areas to farm sector.

Surplus harvesting of late kharif onion crop has dragged the onion export prices down by around 10 per cent in February compared to a month ago. According to a forecast by The National Horticulture Research and Development Foundation (NHAFED) in Nasik , the onion arrivals are expected to be more on account of improvement in the area covered under onion in Maharashtra, Gujarat and Bihar .

A study by the Federation of Indian Chamber of Commerce and Industry (Ficci) has reiterated that the Food and Beverage industry is expected to grow between 8-8.5 per cent in value terms during 2005-06.

Segment	Estimated growth rate *(in per cent)*
Semi-processed or ready-to-eat	22
Ice cream and edible oil	20
Fruit juices, pulp and concentrates	18
Sauces and Ketchup	17
Branded milk products	15
Source: Economics Times, February 06, 2006

The industry needs technology improvement, automation and computerisation in the manufacturing process, quality control, improvement in packaging to improve shelf life of the products.

To encourage grape cultivation, Ministry of Agriculture has proposed to set up four nurseries and increase in area under grape cultivation by 1,000 hectares in Maharashtra . These would be in Nashik, Pune, Nagar, Solapur, Kolhapur , Sangli and Satara. In addition to this, about 20 pack houses with the attached facilities would also be developed.

The ministry of fertilisers and chemicals has announced that from 1^st April 2006, local taxes would be included in the maximum retail price (MRP) of drugs. Also it would be made mandatory to specify details like medicine name, cost, expiry date and manufacture date in both English and Hindi.

The national pharmaceutical policy, currently being finalised, proposes the imposition of a 2 per cent health cess on taxpayers so as to make available free medicines for people below the poverty line (BPL). The ministry also intends to levy a 2 per cent additional tax on the pharmaceutical industry to generate funds for implementing the same.

INFRASTRUCTURE

Coal India Ltd (CIL) has expectations of posting a profit before tax (PBT) of Rs 8,000 crore for 2005-06, a growth of 66.67 per cent over the previous year’s profit of Rs 4,800 crore. Its gross sales are expected to touch Rs 32,000 crore by March 31, 2006. Last year, the CIL has generated Rs 25,803 crore of net revenue. In the current fiscal year, CIL will produce 345 million tonne (mt) of coal against a target of 343 mt. CIL has plans to disinvest 5 per cent of its capital, with an equity base of Rs 6,316 crore and the face value of 5 per cent, that comes up to Rs 315 crore. The CIL chairman expects a valuation of 10 times the face value when the shares will be placed in the market resulting in a total of Rs 3,000 crore to be raised.

The container corporation of India (Concor) has plans to set up three new inland container depots (ICDs) in the 2006-07. The ICDs, in Mirzapur (UP), Sonepat (Haryana) and Dhapad ( Punjab ), would add to Concor’s current 55 terminals spread all over the country. The ICD at Sonepat is yet to be commissioned, while the one in Dhapad would start functioning by April this year.

The railways are expected to show an operating ratio of nearly 84, which surpasses the targeted 90.2, indicating improved financial health of the railways. The operating ratio is the expenditure on every Rs 100 earned. This has been attributed to the net internal generation by railways has been nearly 65 per cent more than the fund balance of Rs 6,9363 crore in 2004-05.

INFLATION

The annual point-to-point inflation rate based on wholesale price index (WPI) has gone down to 4.30 per cent for the week ended January 28, 2006 from 4.51 per cent during the previous week. The inflation rate was higher at 5.14 per cent in the corresponding week last year.

The WPI in the week under review has declined by 0.3 per cent to 196.4 from 197 for the previous week (Base: 1993-94=100). The index of primary articles’ group (weight 22.02 per cent) has risen by 0.2 per cent to 194.7 from the previous week’s level of 194.3, due to an increase in the price index of both, food and non-food articles. The index of food articles has gone up due to an increase in the price of jowar, arhar, moong, tea and condiments and spices, bajra, maize and rice. The index of non-food articles has gone up by 0.2 per cent to 177 from 176.7 in the last week, mainly due to the higher prices of cotton seed, raw silk, raw rubber, logs, timber and mesta. The index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent) has remained unaltered at the previous week’s level of 311. The index of ‘manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has declined considerably by 0.6 per cent to 171.4 from the previous week’s level of 172.5, mainly due to reduced prices of base metals and ‘chemical and chemical products’.

The latest final index of WPI for the week ended December 3, 2005 has been revised downwards; as a result both, the absolute index and the implied inflation rate declined to 197.6 and 4.44 per cent respectively, as compared to their provisional week’s level of 197.8 and 4.55 per cent, respectively.

Overall, the rate of inflation has remained reasonably contained in the range of 4 to 4.5 per cent in last two months. Moreover, the Reserve Bank of India , has hiked the reverse repo rate, the rate at which banks park their excess money with the RBI, by 25 basis points to 5.5 per cent on January 24, 2006, with a view to anchoring inflationary expectations and maintaining the emphasis on price stability.

The Reserve Bank of India (RBI) has tightened norms for banks fixing the interest rates on NRI (non-resident Indians) deposits, as this would primarily stop arbitrage opportunities arising out of the interest rate differentials. It has been decided that in order to ensure uniformity and transparency, Foreign Exchange Dealers’ Association of India (Fedai) would quote the Libor/swap rates, which will be used by banks in arriving at the interest rates on NRI deposits. Some banks have represented that in the absence of any direction on how to set rates based on Libor/swap rates, banks are using different methods, sources and cut-off timings to decide the interest rates on NRE (non-resident external)/FCNR (foreign currency non-resident) (B) Deposits, resulting in significant variation in interest rates offered to NRIs. To tackle this discrepancy, the RBI has streamlined the rates on NRE deposits. The difference in NRE deposit rates has been very marginal, in the range of 3-5 basis points. However, it makes a difference when a client transacts with large funds. This difference arises from the fact that banks use different Libor rates as the base. With the introduction of a benchmark, there would be a level playing field among banks. A notification released earlier in the week by RBI had said Fedai would publish the deposit rates for 5 maturities in six currencies on the last working day of each month. Fedai would indicate the first such rates on the last working day of February 2006.

The RBI has warned banks of rising incidents of frauds in home loans. The central bank has directed all banks to strictly adhere to due diligence procedures while disbursing the loans. The RBI has also unearthed a number of cases where builders have defrauded banks by pocketing housing loans, which they managed to obtain in the names of fictitious persons by submitting forged documents. An RBI note, recently sent to banks, has cited several instances in which banks have extended loans to customers who produced forged documents. There are cases in which same property has been offered as security to different banks by submitting fake title deeds. In some cases properties, which were mortgaged to banks, did not even exist. The RBI also feels that some of the banks have been extending loans to customers without verifying details. The documents – title deeds, income tax returns, salary certificates etc – submitted for availing of loans were found to be fictitious. Similarly, there are distortions in the profiles of borrowers too. In some cases, borrowers added names of co-applicants to avail of a higher loan amount. Some of the foreign and private sector banks had been extending home loans without the borrower even having to put in any margin money, which has led to the loan-to-value ratio being 100 per cent or more. In contrast, public sector banks’ loan-to-value ratio is only 80 per cent. Mortgages, however, contribute only three per cent of the country’s GDP compared with 51 per cent in the US , according to industry estimates. The size of the housing loan market is expected to be about Rs 75,000-80,000 crore this financial year.

Life Insurance Corporation of India (LIC) has earned Rs 3,700 crore profit from investment operations, equity and debt markets, till date in current the financial year. It expects to take a total gain of Rs 5000 crore by end of March 2006. At present, the market value of its equity portfolio is Rs 84,000 crore while book value stood at Rs 38,000 crore.

HDFC Standard Life Insurance company’s share has reported a 150 per cent rise in its first year premium income at Rs 599 crore in the nine months ended December 2005.

The annual plan sizes for the states of Madhya Pradesh , Sikkim and Bihar for the year 2006-07 have been approved at meeting between the Deputy Chairman Planning Commission and Chief Ministers of respective states. The plan outlay for state of Madhya Pradesh has been agreed at Rs 9020 crore which includes onetime additional central assistance of Rs 80 crore for projects of special assistance to the state including Bhopal Memorial. On the basis of identifiable resources, the plan outlay of Rs 550 crore has been agreed for the state of Sikkim . This includes onetime central assistance of Rs 20 crore provided by the Deputy Chairman Planning Commission for projects of special interest to the state. The plan outlay for the state of Bihar has been agreed at Rs 8250 crore and includes additional central assistance of Rs 50 crore for priority schemes of the state.

A double taxation avoidance convention (DTAC) has been signed between India and Serbia and Montenegro providing for moderate rates of taxes on certain categories of income in line with recently concluded treaties to promote trade and investment between the two countries. The convention has been signed by the Finance Minister on behalf of India and by Minister for International Economic Relations on behalf of Council of Serbia and Montenegro . The convention will cover taxation of income, surcharge thereon and wealth tax in the case of India and profit tax, income tax, tax on capital and tax on revenue from international transport in case of Serbia and Montenegro . Apart from providing for avoidance of double taxation, the proposed DTAC also provides for exchange of information and also for a mutual agreement procedure to resolve the issues regarding application of the DTAC. India already has double taxation avoidance agreement with 69 countries.

The revenue collection from indirect tax has increased by 16.2 per cent during April-January 2006 over the corresponding period of previous year. Of this, collections from customs and excise has shown a rise of 14.6 per cent and 10.8 per cent, respectively.

In a study by the RBI on ‘state finances of budgets of 2005-06’, a likely outturn for state government finances for 2005-06 is expected to be higher by Rs 17,757 crore to Rs 1,27,828 crore than the budget estimate of Rs 1,10,070 crore. The study states that there are a few states, which have estimated an increase in revenue deficit (5 states) and gross fiscal deficit (11 states) in 2005-06 (Budget Estimates) over 2004-05 (Revised Estimates), while only a few states would account for the major part of the overall correction.

South Indian Bank will be tapping the market on February 10 with a follow-on public issue of equity shares to raise around Rs. 150 crore to augment its capital. The issue would close on February 15

Gitanjali Gems is tapping the market with an IPO of 1.7 crore shares for Rs. 10 each by 100 per cent book building process.

K Sera Sera Production Limited will tap the market on February 16 through a public issue of 5,000,000 equity shares of face value Rs. 10 each. The issues closes on February 22.

GVK Power and Infrastructure public offer has been oversubscribed by 20 times. The company received over 2 lakh applications in the price-band of Rs 260-310

The RBI in a letter, released at a press conference by Investors’ Grievances Forum, has directed all banks to investigate the role of registrars, depository participants, brokers and individuals in obtaining funds from banks “through devious means to corner retail portion of public offers”. The banks have also been asked to ascertain that directions and guidelines on know your customer and anti-money laundering, advances against shares and IPO funding and internal controls were complied with in “letter and spirit” and not disregarded at any stage.

RBI has referred the seven banks fined for their role in the recent IPO allotment case to the government for further investigations. Based on the gravity of irregularities and in public interest, the government will decide whether the Serious Fraud Investigations Office could be brought into the picture for a comprehensive probe.

The strong FII inflows, a drop in the domestic inflation rate and buying interest shown by both, retail and institutional investors, all pushed the bourses to touch new closing peaks. During the week, the BSE sensex crossed yet another milestone on February 6 as it touched the psychological important level of 10,002.83 points before closing at 9,980.42 points. Meanwhile, sensex gained around 368.39 points or 3.78 per cent over its previous week’s closing value as it closed at 10,110.97 points on February 10. Among the sectoral indices, BSE HC recorded the highest gain of 7.443 per cent as it closed at 3,614.18 points, followed by 6.53 per cent as it closed at 1,828.33 points.

Likewise, the broader S & P CNX Nifty ended the week at 3,027.55 levels on February 10, gaining around 86.95 points or 2.96 per cent over its previous week’s closing value. BANK Nifty also recorded a gain of 4.18 per cent as it ended the week at 4,581.85 points over its previous weeks closing value.

The total turnover of NSE’s F & O segment declined to Rs 94,786 crore as against Rs 117,229 crore in the previous week; the daily average turnover stood at Rs 23,696 crore.

The RBI has auctioned 7.46 per cent 2017 paper and 7.40 per cent 2035 paper for an aggregate amount of Rs 6,000 crore as a part of the government’s scheduled market borrowing programme on February 07. RBI has set a lower-than-expected cut-off yield of 7.38 per cent and 7.63 per cent for 7.46 per cent-2017 paper and 7.40 per cent-2035 paper, respectively. Meanwhile, the RBI has rejected all bids worth Rs 813 crore that it received for the Rs 500 crore auction of 182-day treasury bills

Concerns over the tight liquidity in the market coupled with the auction saw the call rates closing at 6.90 per cent to 7.10 per cent as against 6.40 per cent to 6.60 per cent in the previous week. The average daily subscription at the repo auction rose to Rs 17,422.5crore from Rs 11,470 crore during the last week. Moreover, lower inflation rate at 4.30 per cent from the previous 4.51 per cent as well as lower-than-expected industrial output growth at 5.0 per cent in December aided the rise in gilt prices. However, concerns over persistent liquidity crunch capped the gains. The weighted average YTM of 8.07 per cent 2017 paper was 7.34 per cent on February 10 as compared to 7.38 per cent during the previous week. The 1-11 year YTM spread decreased by 3 basis points to 64 basis points.

Oriental Bank of Commerce is planning to tap the market so as to mobilise around Rs. 500 crore thorough Tier-II bonds.

During the week, the rupee remained range bounded against the dollar as moved from Rs 44.19 to Rs 44.27 per dollar supported by strong FII inflows and sporadic RBI intervention. The six-month forward premia closed at 2.04 per cent on February 10 as against 2.10 per cent.

Guarseed and gum prices are expected to surge by around 25 per cent to Rs 23 per kg from Rs 18 per kg and Rs 60 per kg from Rs 45 per kg, respectively, in March owing to rising demand and depleting stocks.

Spot prices for wheat are expected to decline by more than 10 per cent in the next month owing to fresh arrivals and government’s decision to import half a million tonne. The prices, which were quoted at around Rs 875 per quintal at the beginning of December, sustained a steady increase through the month and, thereafter. Rose fairly sharply in January to touch a high of Rs 1,012.50 per quintal on January 12.

Crisil has reaffirmed the ‘AA-‘ rating assigned to NIIT Technologies’s Rs 500 million non-convertible debentures programme. The rating continues to reflect NIIT’s focussed strategy, with operations in the IT services sector, a comfortable financial risk profile and healthy industry prospects.

Crisil has reaffirmed the ‘P1+’ rating assigned to Finolex Industrie’s Rs 1.1 billion short-term debt programme. The agency has also downgraded the ratings on the company’s two non-convertible debentures issues worth Rs. 0.75 billion and Rs. 0.5 billion, respectively from ‘AA +’ to ‘AA-‘.

Crisil has placed the ratings ‘P1+’ assigned to IndusInd Bank’s Rs 7 billion certificates of deposit programme and short-term fixed deposit programme under rating watch with development implications. The agency has done this keeping in mind the recently issued guidelines on securitisation of standard assets issued by the Reserve Bank of India (RBI). The guidelines outline, among other things, the capital treatment of enhancements provided to securitisation transactions

Crisil has assigned a provisional 'AA- (so)/ Stable' rating to the Rs.3 billion bond issue of Karnataka State Financial Corporation (KSFC). The provisional rating will become valid only after the legal documentation pertaining to the structure is duly executed and the same is confirmed by the trustee to the bond issue. The rating is centrally based on the credit enhancement provided by government of Karnataka, in the form of an unconditional and irrevocable guarantee to the proposed bonds

Crisil has reaffirmed the 'AAA/Stable' ratings on Neyveli Lignite Corporation Limited's (NLC's) Rs. 27 billion and Rs. 5 billion debt programmes, respectively. The ratings reflect the company's robust financial risk profile and ownership of captive mines for fuel supply.

Crisil has assigned ‘AA +’ rating to Mahindra Finance’s Rs. 2 billion non-convertible debentures programme. The rating takes into account the company’s importance to Mahindra and Mahindra Limited, its parent company.

Crisil has reaffirmed the ‘AA-‘, ‘AAA (SO)’, ‘FAA/Stable’ and ‘P1+’ ratings to Chambal Fertilisers and Chemicals Limited’s Rs. 500 million non-convertible debentures programme, Rs. 617.5 million non-convertible debentures programme, fixed deposits programme and Rs. 2.75 billion short-term debt programme, respectively. The ratings continue to reflect Chambal Fertilisers and Chemicals Limited's (Chambal Fertilisers') established position in the urea industry, especially in North India . This, along with its superior operating efficiencies, will enable Chambal Fertilisers to capitalise on the sector's healthy business prospects, going forward. The rating also reflects the core fertilizer business' stable cash flows, given the regulated nature of the domestic urea industry.

Crisil has revised the ratings assigned to the NCD and FD programmes of The Dhampur Sugar Mills Limited (Dhampur Sugar) from BB/FB+ to BBB+/FA/Stable and removed the same from 'Rating Watch with Positive Implications'. The rating changes follow Crisil’s expectation of a significant strengthening of Dhampur Sugar's capital structure following the sale of its Rauzagaon unit to Balrampur Chini Mills Limited for Rs. 1.82 billion, and the proposed equity infusion into the company.

Crisil has reaffirmed the ‘AA-‘ and ‘P1+’ ratings assigned to Jagran Prakashan’s Rs. 150 million non-convertible debentures and Rs. 300 million commercial paper programme. This rating action reflects the benefits Jagran is likely to derive from its successful Initial Public Offering (IPO) of Rs. 3.7 billion. The ratings continue to reflect Jagran Prakashan's strong position in the Indian newspaper market, underpinned by its daily newspaper Dainik Jagran, which is the market leader in terms of circulation and readership.

Crisil has reaffirmed the real estate developer rating of 'DA2+' on Rohan Builders and Developers Private Limited (Rohan Builders). The rating indicates that the developer has a Very Good track record of executing real estate projects as per the agreed quality levels and in transferring a clear title within the stipulated time schedule.

Fitch Ratings has assigned an expected National rating of ‘AAA ( Ind )(SO)' to the pass through certificates ("PTCs") issued via a special purpose vehicle ("SPV"), called Bond Receivables Trust 2006 – Series I. The transaction is a securitisation of two debentures issued by Standard Chartered Bank in India ("the borrower"). The expected rating of the Series A PTCs (further divided into Series A1 and A2 PTCs and collectively referred to as the "Series A PTCs") reflects the credit quality of the payment structure of the Series A certificates and legal opinions.

Icra has assigned ‘LAAA’ ratings to Rs.1, 000 million non-convertible debentures and Rs.1, 000 million subordinated debt programmes. It has also assigned an ‘A1+’rating to the Rs.1, 000 million commercial paper programme of Infrastructure Leasing & Financial Services Limited (IL&FS). . The ratings factor in IL&FS’s favourable asset quality, profitability of its corporate credit portfolio, comfortable capitalisation and the expected gains from the sale of some of its strategic investments in the near term.

Icra has assigned an ‘A1+’ rating to the Rs. 10 billion short-term debt Programme of Reliance Infocomm Limited (RIC). The rating factors in RIC’s established position as a leading and integrated telephony service provider with a presence in wireless, local loop, and domestic and international long distance; its competitive cost structure, the operational strengths derived from its pan India network, and its large and fast growing subscriber base which currently is the second highest amongst mobile service providers in the country.

Icra has reaffirmed the ‘LAA’ rating assigned earlier to the Rs. 3 billion subordinated bond programme of Indian Bank (IB). The ratings take into account the consistent improvement achieved in its asset quality over the past few years, with fresh generation of non-performing assets (NPAs) being contained, besides its improving core profitability, and the growth achieved in its corporate credit portfolio without jeopardising overall asset quality.

Tata AutoComp System Limited (TACO) and GS Yuasa International Limited (GYSIN) Japan , Asia ’s largest automotive battery manufacturer, have entered into a 50:50 joint venture for automotive batteries. The joint venture will manufacturer batteries for the retail market for the four wheelers such as cars, commercial vehicles and tractors. This is Rs 90 crore project and the factory will be set up at Ranjangaon MIDC, near Pune to manufacturer 2 million units.

Ranbaxy Laboratories has entered into a 70:30 joint venture with South Africa based Community Investment Holdings, Christened Sonke Pharmaceuticals (Pty) Limited for marketing and selling anti-retroviral products in South Africa and other African market.

Western India Shipyard Limited has received an order worth Rs 18.8 crore from PMC Projects ( India ) Private Limited for constructing a vessel.

Praj Industries has won Rs 18 crore contract for setting up a 1,20,000 litres per day greenfield distillery in Maharashtra from Shri Renuka Sugars.

Larsen and Toubro has secured a Rs 144 crore order from Abu Dhabi Water and Electricity Authority for constructing 85 km long 220 kv transmission lines.

Shree Renuka Sugars is setting up a sugar refinery with a capacity of 2,000 metric tonne per day near Haldia Port in West Bangal, at an estimated cost of Rs 250 crore for catering domestic as well as the South Asian market.

Voltas has decided to sell its Hyderabad based manufacturing facility. It has given voluntary retirement to all 3500 employees at an amount of Rs 65 crore. It is in process of shifting its unit engaged in making retail coolers for food products to Pantnagar in Uttaranchal.

Commercial vehicles major, Ashok Leyland, has reported a 6 per cent rise in its overall sales volume to 5,787 units in January 2006, while domestic sales have shown a 21 per cent growth to reach 5,618 units and export sales have dropped by 79 per cent to just 169 units.

Aurobindo Pharma Limited, through its wholly-owned subsidiary Aurex Generics UK, has acquired UK based Milpharm, a generic formulation pharmaceutical company

Kamat Hotels (India) Limited has posted 63 per cent rise in its income from operations at Rs 24 crore in its third quarter ended December 2005 and a whooping 450 per cent rise in net profit to Rs 6.1 crore over the same period previous year.

The trade unions like Bharatiya Mazdoor Sangh, Indian National Trade Union Congress, All-India Trade Union Congress and United Trade Union Congress have asked the Finance Minister to revise industrial wages by constituting ‘Sixth Pay Commission’ in a pre-budget meeting. They have also threatened to call on nationwide strike if this demand is not met. The past experience of the Fifth Pay Commission 1997, shows that states have suffered badly on account of increased salary and pension bills. Before the recommendation of the Fifth Pay Commission, the wage bill (including pension dues of Rs 5094 crore) of the centre stood at Rs 21,885 crore in 1996-97. This went up by 99 per cent to Rs 43,568 crore in 1999-00. For states, the wage bill went up by 74 per cent to Rs 89,813 crore from Rs 51,548 crore during the same period. As expected, it has taken years to claw back to the fiscal rectification, which provides enough reason to think over the ongoing consideration for constituting the Sixth Pay Commission.

The Central Advisory Contract Labour Board (CACLB) has planned to conduct a sector-wise study on contract labour related issues in the country in terms of existing problems like implementation of law and minimum wages. Contract labour is being employed across several segments of industry, banking sector and the government. According to (CACLB), since contract labour cannot be abolished, it should be ensured that the contract labourers get paid their minimum wages. The government of Andhra Pradesh has already amended its law to include contract labour in sectors such as security agencies etc.

The Employees’ Provident Fund Organisation (EPFO) is likely to utilise its reserve funds to pay 8.5 per cent interest rate to its subscribers. This is to meet the gap between the EPFO’s returns from investments and interest commitments towards its subscribers. Out of the total corpus of Rs 1,52,643 crore, the EPFO has invested around Rs 22,741 crore (15 per cent) in central government securities, Rs 16,860 crore (11 per cent) in securities guaranteed and issued by various state governments, Rs 29,494 crore (19.3 per cent) in financial institutions, Rs 30,012 crore (19.6 per cent) in the public account investments and Rs 53,534.2 crore (35 per cent) in the special deposit schemes, as of end October 2005.

The sea food exporters in the country will go on strike for three days, starting February 13, in protest against the recent decision by the Centre to not classify DEPB credit as export income, denying the exporters income-tax benefits, this will lead marine sector to shell out around Rs 400 crore as tax liability.

India

and Russia have decided to set up a joint group to examine the feasibility of entering into a comprehensive economic cooperation pact. By the end of this year the group will look for ways to increase bilateral trade turnover to $10 billion by 2010.

The government expects FDI in India to cross $7 billion in 2005-06, with auto and mining sectors expected to attract huge funds.

The state government of Punjab has approved as many as nine special economic zones in order to provide a boost to the state economy.

The Reserve Bank of India has asked banks to ensure that funding needs of small and medium exporters were met on priority basis. The central bank also asserted that banks should give priority to foreign currency export credit requirements of exporters over foreign currency loans to non-exporter borrowings.

A closer look at the 36 services allowed to set up special economic zones reveal that call centres and content development or animation firms can apply for permits to set up such zones. Other services that can avail benefits of SEZ include educational, training, warehousing, R&D, computer software and information-enabled services.

In a sign of the increasing maturity of the domestic infotech industry, the average value of contract (in other words the deal size) has been on the upswing in recent times. An analysis of deals bagged by Infosys, TCS, Wipro and HCL Technologies over the past seven quarters shows that the average deal size has almost tripled from $15 million in 2004 to nearly $50 million by end of last year.

The Telecom Regulatory Authority of India (TRAI) is planning to ask mobile operators to withdraw lifetime validity schemes on the grounds that they mislead the customers. Offered under different names like Jeevan Sathi, Chalta Rahe, Lifelong and Lifetime validity, these schemes are misinforming customers with misleading titles. The Trai stand comes on the basis of a direction it issued in September 2005, to withdraw plans with misleading titles. Recently, the cell operators said that the lifetime validity means the lifetime of their licence and not the subscribers’ lifetime. Alternatively, TRAI may ask operators to specify their start and end date of licence period, after the scheme name and provide exit options to subscribers. TRAI believes the operators introduced lifetime schemes to counter introduction of MNP (mobile number portability). Lifetime validity offer at about Rs 1,000 may act as a barrier for MNP. Cell companies, which do not favour MNP, could take the position that MNP would be irrelevant once every operator has acquired a huge portion of subscribers in their lifetime tariff plans.

In a joint declaration, state owned BSNL and MTNL announced the launch of uniform corss-country call rates under the OneIndia plan as per communications minister Maran’s proposal last year. Effective March 1, 2006, mobile subscribers will be charged only Re 1 per minute while land line subscribers will be charged Re 1 for every 3 minutes up to 200 kms and Re 1 per minute beyond 200 kms. Currently subscribers are charged Rs.2.40 per minute on STD and Rs 1.20 for a 3-minute local call. But there is a flip side to the plan-those opting for the scheme will have to pay a higher monthly rental of Rs 299, up from Rs 50 – 150 for rural subscribers and Rs 120 – 250 for urban subscribers. Also, unlike other plans, OneIndia does not come with any free calls.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

Source: Economics Times, February 06, 2006

INFRASTRUCTURE

INFLATION