Current Economic Statistics and Review For the Week 
Ended September 08, 2007 (36^th Weekly Report of 2007)

Theme of the week:

Globalisation has brought about metamorphic changes in the way the national governments conduct domestic policies. The process of integration with the global economy has led to widespread liberalisation and implementation of financial market reforms in many countries, primarily focusing on integrating the domestic financial markets with the global markets. This in turn has brought about significant development in the world economy. One of them has been the remarkable rise in the mobility of capital across national borders.

These cross-border flows are dominated by portfolio investments because of the ease with which the transfers can place as compared with foreign direct investments. The portfolio flows, which were non-existent till the 1980s, have thus become a major component of international capital flows from the early 1990s.

FIIs in India

The Indian situation has been no different. Till the beginning of 1991, India had a highly regulated financial system with a restrictive foreign exchange regime. As part of the initiation in the early 1990s of a process of a market-friendly environment for foreign investment, the entry of foreign institutional investors (FIIs) was permitted. In September 1992, the government of India announced the opening up of the Indian financial market to FIIs to widen and broaden the Indian capital market. Since then, the net investments by FIIs in India have been positive every year except in 1998-99. At first only pension funds, mutual funds, investment trusts, asset management companies, nominees companies and incorporated or portfolio trust managers were allowed to access Indian stock exchanges in India . In 1996, the eligible categories of FIIs were expanded to include university funds, endowments, foundations or charitable trusts or charitable societies.

Rapid increase in Numbers

FII registrations in the country have gone up significantly over the years. There were 450 registered FIIs in March 1999 and by March 2004 it had touched 540. In March 2005, the number had climbed to 685. Reflecting the congenial investment climate, the total number of FIIs registered with SEBI increased to 1066 as on July 31, 2007 compared to 882 a year ago, an increase of 184 over the year.

Trends in FII’s Investments

From a modest beginning in 1992-93 at Rs 13 crore (US$ 4 million), FIIs’ net investment rose to Rs 8,574 crore (US$ 2,432 million) in 1996-97 and to Rs 5,957 crore (US$ 1,650 million) in 1997-98. The net investment flows by FIIs have always been positive every year from the year of their entry except in the year 1998-99; in that year,  it was negative (US$ 386 million) primarily because of the uncertainty that prevailed after India tested a series of nuclear bombs in May 1998 and the imposition of economic sanctions by the US, Japan and other industrialized countries. Following the IT boom, the FIIs reinvested a record amount of Rs 10,122 crore (US$ 2,339 million) in 1999-00 and sizeable investments continued up to 2001-02. As a result, the cumulative amount of FII investment in India had accumulated to a sum of over US$ 15,000 million during the eleven year period between 1992-93 and 2002-03. But what has happened thereafter is more remarkable.

2003-04 onwards: Gross Purchases and Sales

In the recent past, the FIIs have emerged as important players in the Indian equity market. During the last three years, there has been a phenomenal increase in the portfolio investment by FIIs. If one looks at the trend of FII investment in the stock market since 2003-04, it shows that there has been a very sharp increase in the net FII investment since April 2004. The data in Table 2 indicates that gross purchases in 2003-04 amounted to Rs 1,44,857 crore a growth rate of 208 per cent compared to the year before. This rising trend of portfolio investment inflows have risen to unprecedented levels in 2004-05 and 2005-06 to Rs 45,881 and Rs 41,467 crore respectively.

FIIs continued to make large investments in stock markets for third successive year. In 2006-07 the net investments by FII were lower at Rs 30,840 crore than a year ago, however, the gross purchases and gross sales were higher amounting to Rs 5,20,508 and Rs 4,89,667 crore respectively, indicative of continuous churning of portfolios. As a result, the cumulative FII investment has touched US$ 52 billion.

This reflects a wide variety of functions: importance of emerging markets for portfolio flows as well as domestic conditions of strong macro-economic fundamentals. FIIs have been attracted to the Asian stock market also because of transparent regulatory system, abolition of long-term capital gains tax and encouraging corporate results.

Expensive market

At present, a majority of the FIIs consider India ’s equity market expensive for investments. But according to Andrew Holland, Head – Strategic Risk Group, DSP Merrill Lynch, “ India is a very good investment destination. It is a bit pricey when compared to other Asian markets, but growth is much faster here. Strong market performance, large market capitalization and satisfactory GDP growth rate neutralizes the expensive tag”.

FII investment and Sensex

FIIs continue to be one of the major players in the stock market and are becoming more important as well their influence on the market is significant. Chart 1A shows that the influence of FIIs investments and the movement of BSE Sensex. By and large, FIIs exceedingly have high level of influence on the movement of sensex value in India , since the other market participants perceive the FIIs to be flawless in their assessment of the market and tend to follow the decisions taken by FIIs.

Movements in the Sensex during the last two years have clearly driven by the behaviour of FII investments in the Sensex companies (Chart 1B). Hence, FII investments may possibly have played a starring role in Sensex’s journey to 15,000 and beyond.

The 2001 edition of National Stock Exchange’s annual publication, Indian Stock Market Review says: “Though the volume of trades done by FIIs is not very high as compared to other market participants, they are the driving force in determination of market sentiments and price trends. This is so because they do only delivery-based trades and they are perceived to be infallible in their assessment of the market.” (Page No 125). Apart from the psychological factors mentioned in NSE (2001), the influence of FIIs on the movement of Sensex will also become clear if one looks at the shareholding pattern of the 30 companies that constituent the index, BSE Sensex.

FII equity holding in BSE Sensex companies

The data in Table 3 indicates that as an investor group, FIIs are the biggest non-promoter shareholders of the Sensex companies. The buoyancy in the BSE Sensex experienced in the last two years is owing to the rising FII interest in the Sensex companies. Since 2003-04, FIIs have been systematically increasing their stock holding in India ’s top 100 companies and predominantly in the – Nifty 50 and the BSE Sensex companies.

A recent analysis by Parthaprathim Pal estimated that at the end of March 2004, FIIs controlled on average 22.04 per cent of shares in Sensex companies, whereas in December 2002, the FII shareholding was only about 16.5 per cent.

As of March 2007, the average FII shareholding in Sensex companies is around 23 per cent. One of the striking feature, however, is that this proportion varied from a low of 5.2 per cent to a high of as much as 68.9 per cent in the case of HDFC and 58.7 per cent in Satyam Computers.

During the past 4-5 years, steadily FIIs have been increasing their stock holding in Bharti Airtel, Reliance Industries, L&T, HDFC and ICICI Bank. Surprisingly, the FII shareholding in some of the sensex companies have almost doubled in just 2 years. For instance, FII equity stake in ICICI Bank rose to 46.7 per cent in March 2004 from 22.3 per cent in March 2002. As well, the FII holding in Bharti Airtel increased to 24.4 per cent in March 2005 from 9.2 per cent in the previous year.

Table 4, which provides the frequency distribution of sensex companies according to the size class of FII shareholding proportions at the end of the financial years, suggests that FIIs do shift in and out of particular shares, just as they are known to move in and out of particular markets.

In some of the companies the FIIs have reduced their exposure, whereas they have increased their exposure in selected companies. At the end of March 2002 there were 6 companies in which the shareholding of FIIs was less than 10 per cent, this figure had fallen to 4 by March 2007, whereas the number of companies in which FII exposure was 11 – 49 per cent had risen from 19 to 24 and those with above 49 per cent exposure from nil to 2 companies.

FII investment in IT companies

Despite of IT stocks being expensive, FIIs prefer buying more and more equities in IT companies on account of robust growth and higher returns. Over the last three years, the IT companies witnesses a decline in their promoter group holding while the FIIs holdings are going up. Table 5 indicates that the decline was steep – in excess of 5 percentage points in case of Infosys and Satyam, while it was a little over three percentage points in case of TCS, Wipro and HCL.

Concern about the FIIs investment

Portfolio investments have some macro-economic implications. While contributing to build-up of foreign exchange reserves, FII investments at times influence the exchange rate, which may possibly lead to artificial appreciation of the local currency. For instance, the huge FII inflows in the past one year is reasonably accountable for the appreciation of the rupee vis-à-vis US $ by around 11 per cent in the last 7 months. The RBI reference rate of the rupee to a dollar was Rs 44.82 on December 12, 2006, which has strengthened to Rs 40.38 on July 12, 2007.  

FIIs investment and the Sensex

The Sensex in the last two years has been rising remarkably; there have been more months when the sensex has been on the rise rather than on the decline. Given the perception about FIIs as market leaders, the increasing importance of FII trading and their dominant position in the Sensex companies, it is not surprising that FIIs are in a position to influence the movement of Sensex in a significant way. Though the FII investments are operating within the stipulated limits prescribed by the regulators and also as they do not account for a large part of the turnover, they may nevertheless pose a threat to the stability of the domestic market if all of them choose to exit the market at a one single point of time thereby spreading the contagion effect.

Similarly, if any set of developments encourages an unusually high outflow of FII investment from the stock market, it can impact negatively on the value of the rupee. As also, if the FIIs as a group choose to move out of a particular company, a collapse in the price of the equity is inevitable.

The growing concentration of FII shareholding in the sensex companies could also reduce the stability base of the stock markets. For instance, in the case of HDFC, an FII pull-out, can have significant implications for the financial health of what is an important housing finance institution in the financial sector of the country.

Conclusion

It is obvious that the FIIs have begun to play an influential role in India ’s equity market. First, within four years, 2003-04 to 2006-07, FIIs’ cumulative investments have tripled from $15.24 billion to near $52 billion. In rupee terms an additional injection of about Rs 4,73,000 crore during the above period, appears as a phenomenal amount putting external pressure on the capital market. Second, FIIs have a tendency to churn their funds in a very dynamic manner thus contributing to greater volatility in equity prices. Their operations have also a strong trading and profit grabbing instinct and not long-term investment instinct. Therefore, taking advantage of the lows in equity prices and profit-taking while the prices are high, are an inherent aspect of the FII operations. As Shown in a graph above, there has been a close link between FII investments and the movements in the Sensex. Finally, in 6 out of 30 Sensex shares, FII shareholdings have exceeded 20 per cent. In eight scrips, this share has exceeded one-third. These suggest that FIIs have a strong influence on the movements of the Sensex.

In such a scenario, the most reasonable alternative for the government is to reimpose some modicum of long-term capital gains tax on equity holdings.

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This note has been prepared by Bipin K Deokar.

References

RBI (2007): Annual Report 2006-07, August 30.

RBI (2006): Annual Report 2005-06, August 30.

RBI (2005): Annual Report 2004-05, August 29.

RBI: Handbook of Statistics on Indian Economy, Reserve Bank of India , Mumbai, various issues.

SEBI: Annual Report, Various Issues, Securities and Exchange Board of India , Mumbai.

SEBI (2007): Bulletin, August 2006.

NSE (2001): Indian Securities Market: A Review, Volume IV, 2001, National Stock Exchange, Mumbai.

Chandrasekhar, C. P. & Jayati Ghosh (2005): “The FII Fest in India ’s Stock Markets”

Chakrabarti, Rajesh (2001): ‘FII Flows to India : Nature and Causes’, Money and Finance, October-December. Reprinted in Chakrabarti, Rajesh, The Financial Sector In India : Emerging Issues, Oxford University Press, New Delhi , 2006.

Sharma Laksmi, “A Gap Analysis of FIIs Investments – An estimation of FIIs Investments Avenues in Indian Equity Market”

Pal, Parthapratim (1998): “Foreign Portfolio Investment in Indian Equity Markets: Has the Economy Benefited?” Economic and Political Weekly, Vol. 33, No. 11, March 14.

Pal, Parthapratim, “Recent Volatility in Stock Markets in India and Foreign Institutional Investors”

K Lakshmi, “FIIs Portfolio Investment Trends in Indian Companies”

Gordan James & Gupta Poonam, “Portfolio Flows into India : Do Domestic Fundamentals Matter?”

Mukherjee, Paramita, Suchismita Bose and Dipankar Coondoo (2002): ‘Foreign Institutional Investment in the Indian Equity Market’, Money and Finance, April- September.

Hukeri Piyusha, (2005): “Role of FIIs in the Indian Capital Market: Is There a Cause for Concern?” http://www.epwrf.res.in/

Highlights of  Current Economic Scene

AGRICULTURE  

The government of Australia has decided to announce revised interim measures (RIM) under biosecurity Australia Policy Memorandum (BAPM) for the import of prawns and its products by the end of September 2007. Implementation of this would affect the Indian marine product exporters severely, as they would be practically evicted from the Australian market, as India is the only country that exports shrimps and its products worth around Rs 200 crore, which is about 2.5 per cent of total annual exports to Australia .

State trading Corporation (STC) has finalised its wheat import tender for 7.95 lakh tonnes lakh tonnes of wheat at an average price of US $389.45 per tonne, cost and freight (C&F). Out Of the total 7.95 lakh tonnes, Glencore International AG of Switzerland would supply bulk of 7.4 lakh tonnes) from which 5.2 lakh tonnes would be delivered at Mundra port in Gujarat for US $385 per tonne in October 2007, US $387 per tonne in November 2007 and US $390 per tonne in December 2007. Besides, it would be delivering 2.2 lakh tonnes in Kandla for US $388 per tonne in October 2007 and US $391 per tonne in November 2007. Apart from this Alfred C. Toepfer of Germany would be supplying 50,000 tonnes at Chennai for US $397 per tonne and the balance of 5,000 tonnes would be supplied by Starcom Resources of Singapore. This tender is more than twice the weighted average of US $178.75 per tonne that had been contracted at 5 lakh tonnes in its first tender floated on February 10 last year.

The poultry prices have risen by about 35 per cent since last week of the August 2007 as the poultry supply is getting affected due to the scare of bird flu. As a result, the sector has been unable to meet the demand from the market, due to which prices are rising upwards rapidly.  For instance, retail poultry price increased to about Rs 110 per kg on September 1 2007, from Rs 90 per kg on August 20 2007. While, the farm price and daily market price (wholesale price) have also risen significantly during the same period, the farm price was ruling at Rs 50 per kg, up from Rs 37 and the daily market price was at Rs 60, up from Rs 45.

According to Central Arecanut and Cocoa Marketing and Processing Cooperative (Campco) Ltd., the state government of Karnataka has approved to release Rs 10 crore for the arecanut sector, under which subsidy would be granted of Rs 10 per kg for each grower and for those who cultivate maximum 10 quintals. This renders that maximum subsidy of Rs 10,000 would be given for each grower, as this sector have drastically been affected by fruit rot disease.

As per Spices Board, India ’s spices exports in April-July 2007 have increased by 29 per cent in terms of volume to 152,650 tonnes due to good demand for chilli and fenugreek, while in value terms it has risen by 42 per cent to Rs 1,385 crore. In the first four months of 2007-08 spices exports have achieved 40 per cent of the full-year target and are likely to export 3.8 lakh tonnes during the entire fiscal year. Exports of pepper, cardamom (large), coriander, fennel, fenugreek, chilli have picked up compared to last year. Pepper exports have soared by 42 per cent to 10,100 tonnes, fenugreek exports have doubled to 5,850 tonnes and that of chilli have touched 71,500 in April-July 2007. Whereas, exports of some spices like cumin, garlic and vanilla have fallen as against those recorded a year ago.

According to Spices Board, India has exported approximately 13,900 tonnes of pepper during April-August 2007 as against that of 9,100 tonnes in the same period a year ago, recording an increase of 35 per cent on account of existing lowest price tag. It has been estimated that total exports might cross 30,000 tonnes by March 2008, 46 per cent of which have already been achieved within the first 5 months of the current financial year. One of the leading exporters believes that if the trend continues in the same manner during short term then India would be the one of the highest exporters of pepper since 2000.

As per National Horticulture Research and Development Foundation, India had exported 1, 15,304 tonnes of onions in August 2006. Currently, the data projected by central government, indicates that India ’s onion exports have fallen rapidly to 65,478 tonnes, i.e., by 43 per cent in August 2007 due to regulation of prices within the country. In wholesale market onion prices have climbed to Rs 18,000 per tonne during the month of August.

According to the study conducted by Media Today group in collaboration with Indian Flowers and Ornamental Plants Welfare Association (iFlora), India’s domestic flower and plant market, which is currently valued over Rs 1000 crore, has the potentiality to widen its market speedily. It is expected that within next five years it would grow to Rs 10,000 crore. As per the study, the domestic consumption of cut flowers is growing at the rate of 30 per cent at present, while floriculture exports have increased gradually from Rs 256 crore in 2003-04 to over Rs 400 crore in 2006-07.

Central Organisation of Oil Industry and Trade have finalised the deal of Soymeal export for October and November delivery and the prices have been contracted between US $275-290 per tonne. It is expected that nearly 3, 00,000 to 4, 00,000 tonnes of soymeal exports would be undertaken from the new crop. While a year ago, export prices of soyameal were lower at around US $80 per tonne, which illustrate that there is an increase in price by about 40 per cent compared to last year. Increase in the price can be attributed to the expected bumper crop and robust demand. Meanwhile, industry is expecting that the soybean harvest in the new season would cross to 8.5 million tonnes, up from 7.6 million tonnes this year.

Saudi Arabia has raised the premiums of crude oil for Asian countries. It would charge more than the benchmark prices for two of its most popular varieties of crude oil that would be one of the highest since last seven years. Dhahran-based Saudi Aramco, the world’s largest state oil company has raised Arab Super Light variety by 50 cents to a premium of US $6.45 per barrel and has narrowed the discounts for Arab Medium by 30 cents to US $1.05 a barrel and by 25 cents to US $3.35 per barrel for its Arab Heavy grade. Asian prices are quoted in relation to the average of Oman and Dubai grades, the two Arabian Gulf benchmarks used by Asian oil refiners and traders. For US customers, Arab Light, Arab Medium and Arab Heavy grades were cut by between 5 cents and 90 cents.

State government of Andhra Pradesh has introduced a plan for enhancing the rural poor and development of agriculture sector would be boosted. Under this plan, it is going to offer 1.32 lakh milch cows to nearly about 5,000 rural woman self-help groups, which would benefit them to enhance their income. Each family would be offered two animals at a total cost of Rs 60,000, and 50 per cent subsidy on the total cost, while remaining would be extended through SHG-Bank linkage programme. This scheme would be implemented in 22 districts, excluding Hyderabad . Further, the state has fixed a target of 9 per cent growth in the milk production during its 11^th Plan period and accordingly has planned to increase the milch cow population in the state and for this purpose it has already provided Rs 500 crore in the current budget as a special package to the agri-allied activity.

Indcoserve, apex body of the various industrial co-operative tea factories identified as Indco factories, has decided to cover members of its factories under a new insurance scheme launched by the Tea Board. This scheme includes life, medical, accident and education and is expected to benefit more than 20,000 small tea growers. One of the insurance companies have come out with attractive packages, whereby a group of five members in a family is covered for at least Rs 30,000 per year in the best hospitals of the Nilgiris, Coimbatore and nearby districts and annual premium would be paid by the tea board.

The state government of Kerala has plans to launch a programme to tap the huge market of ornamental fish trade, by setting up country’s first aqua park for ornamental fish production and marketing in Kadungalloor, near Kochi . As per the central government, the state has the potential to be an excellent player in this sector, as it has pleasant environment and huge fresh water reservoir so it has aided the project, while state government itself has invested Rs 14 crore for the same. The work would be undertaken soon and in the initial phase it is expected to provide employment to 5,000 people directly and 10,000 indirectly. This park would have an existing, but non-functioning farm at Neyyar in Thiruvananthapuram, Parappanagadi in Malappuram and Pannivelichira in Pattanamtitta as satellite farms under it. Infrastructure facilities such as laboratory, quarantine, provision for power, water and storage facility would be provided, so that rearing, marketing, and export of ornamental fishes may get a boost.

The state Government of Kerala has initiated a project under which preliminary steps would be undertaken for the construction of a new dam at Mullaperiyar and some sections under Irrigation Design and Research Board [IDRB]. Consequently, the Ernakulam Minor Irrigation Investigation Sub-division has been shifted to Kattapana Division in order to conduct feasibility in the study of the project. With the construction of new dam, some regions of Tamil Nadu state situated

Industry

Automobiles

BMW India, a 100 per cent subsidiary of the BMW Group is planning to launch its cult premium small car MINI in India by 2009.

Swedish carmaker Volvo has launched ‘S80’Sedan and SUV ‘XC90’ in the Indian market at prices starting from Rs 38 lakh and Rs 45 lakh, respectively.

Infrastructure

Electricity

Bharat Heavy Electricals (BHEL) has entered into a MoU with MMTC to jointly work towards increasing exports of power plant equipment from India . As per MoU, the two companies will tap opportunities of counter trading and bulk buying by MMTC to promote the exports of BHEL equipment overseas.

Petroleum

A Malaysian company Petroleum Nasional Berhad (Petronas) is planning to set up petrol pumps in India for an initial investment of Rs 25,000 crore. The company is in advanced talks with the Indian government for its foray into this market.

Within few days Petrol and Diesel prices are expected to rise by Rs 2 a litre and Re 1 a litre, respectively. The petroleum ministry has moved a cabinet note-seeking hike in prices of petrol diesel, PDS kerosene and domestic cooking gas in line with the rise in international crude oil prices. Indian Oil, Bharat Petroleum and Hindustan petroleum will together lose Rs 52,452 crore in revenues this fiscal year if fuel prices are not raised in line with the cost. The petroleum ministry has projected a revenue loss of Rs 11,088 crore on domestic LPG, Rs 6,682 crore on petrol and Rs 18,562 crore on diesel in 2007-08.Thus the hike in prices of petrol and diesel would help generating additional revenue of Rs 607 crore and Rs 2,479 crore , respectively, during the remaining seven months of fiscal.

Natural Gas

Reliance industries may finally get to price majority of its gas at $3.6-3.7 per million British thermal unit (mmbtu), which is a substantial correction when compared with RIL’s proposed price of $4.33per mmbtu.

Petroleum Products

As a result of improved capability of Indian refineries to process higher quantities of sour varieties of crude oil, the government is planning to revise the ratio of sweet (or low sulphur) and sour (or high sulphur) grade of crude oils in the Indian basket from prevailing 40.2:59.8 to

Inflation

The annual point-to-point inflation rate based on wholesale price index (WPI) declined by 3.79 percent for the week ended August 25,2007. During the comparable week of the earlier year, it was 5.27 per cent.

During the week under review, the WPI remained stable at 213.6 at the previous weeks’ level (Base: 1993-94=100). The index of ‘primary articles’ group, (weight 22.02 per cent), fell by 0.1 percent to 224.5 from its previous week’s level of 224.7, mainly due to lower prices of maize,fish marine,wheat and fruits and vegetables.

The price index of ‘fuel, power, light and lubricants’ group (weight 14.23 per cent)  remained unchanged at the last weeks level.

The index of ‘manufactured products’ group also remained unchanged at the last weeks level of 185.6.

The latest final index of WPI for the week ended June 30, 2007 has undergone upward  revision; as a result both, the absolute index and the implied inflation rate stood at 212.8 and 4.42 per cent as against the provisional data of 212.5 and 4.27 per cent..

Banking

The government has chalked out a plan to merge 13 more Regional Rural Banks (RRBs) as a part of its consolidation strategy to make them viable. With this mergers, the total number of RRBs in India drops to 82 from the present 95.

Financial Markets

Capital Markets

Primary Market

Mundra Port and Special Economic Zone Ltd (MPSEZL) of the Adani Group, is expected to come out with the Rs 1,500-crore initial public offering in October. The group is not planning any revision in the proposed issue due to the recent uncertainties in the equity market. The Adani group had approached Sebi with the MPSEZL issue proposal in March this year. It was the first such proposal from infrastructure sector.

State-owned Punjab and Sind Bank (PSB) may come up with an initial public offering (IPO) sometime next fiscal on the back of improved current year earnings and a planned capital restructuring that is awaiting Government nod.

Dhanus Technologies, a communications service provider with diverse business interests, has announced an initial public offering (IPO) comprising of 3.84 million shares in the price band of Rs 280 to Rs 295. 

Koutons Retail India Ltd, an integrated apparel and retail company proposes to enter the capital market with an initial public offering of 35.24 lakh equity shares of face value Rs 10 each. The issue, which is being made through a 100 per cent book building process, opens on September 18 and closes on September 21. The price band has been fixed at Rs 370-Rs 415.Of the total issue, 26.07 lakh equity shares are a fresh issue while 9.16 lakh equity shares are on offer for sale from current shareholders.

The mandatory grading of public issues by rating issues, as outlined by the (Sebi), is slowly gaining momentum.  According to sources, Icra has some 10-12 public issues under the process of grading. The latest being Precision Pipes and Profiles company, which has been graded 4/5 (denoting above-average fundamentals) by Crisil. While there have been 32 public offerings in the market since May (excluding FPOs), only four IPOs have been graded till now.  Central Bank of India was the only IPO to have hit the market with a grading (4/5 by Care) and saw an overwhelming response from investors. It was fully subscribed and got listed at a premium of 27.58 per cent.  The first IPO to have been graded, after Sebi guidelines were Kiri Dyes and Chemicals by Crisil. Icra has also rated one IPO so far, of Consolidated Constructions, with a grade of 3/5.  The minimum charge for grading an IPO is set at 0.1 per cent of the issue size.

Secondary Market

Market in the week under review ruled on firm note after Federal Reserve chairman Ben Bernanke and US president George Bush assured that they would not let the economy to collapse. BSE Sensex gained in 3 out of the 5 trading sessions and it gained 271.82 points, nearly 1.8 per cent to 15,590.42 points, while the Nifty rose 45.5 points or 1.01 per cent to 4518.60 points during the week. The S&P CNX Defty rose 1.69 per cent as the rupee strengthened yet again. Both FIIs and domestic mutual funds were stable buyers through the week and the market cap hit a new high.  Breadth indicators weakened on Friday with a lower advances: declines ratio. Volume was moderate throughout the week. Most of the losses came in small-caps and secondary mid-caps.  The BSE 500 gained 2.27 per cent and the Nifty Junior also outperformed bigger indices with 2.10 per cent gain. The Bank Nifty was a major driver gaining 2.5 per cent and the CNX IT gained 1.1 per cent despite the strong rupee.   

Foreign institutional investors remained net buyers to the tune of Rs 2191.6 crore, while mutual funds shopped for Rs 353.8 crore.   

There was 28 foreign institutional investors issuing participatory notes (P-notes) as on July 31, 2007, and their cumulative outstanding notional value stands at $86.26 billion - nearly 40 per cent of the value of foreign portfolio investments in India, according to the government.  P-notes, which are offshore derivatives of Indian equities, are issued by FIIs to overseas investors who want to invest in Indian stock market, but do not want to register themselves with the Securities and Exchange Board of India (Sebi). The top five FIIs issuing P-notes are Morgan Stanley & Co International, Merrill Lynch, Espana, Citigroup Global Markets Ltd, Goldman Sachs & Co and CLSA Merchant Bankers. The top five P-notes issuing FIIs together account for about 59.6 per cent of the notional value of the outstanding P-notes as on July 31.

With FII majors such as Citigroup, Morgan Stanley, Goldman Sachs and BSMA picking up a combined stake of over seven per cent in Gitanjali Gems, a Mumbai-based diamonds and jewellery company, the gems and jewellery industry is turning out to be the next destination of the FIIs. The four FIIs have bought the stake over the past few weeks by way of secondary market purchases. They invested around Rs 114 crore to buy the equity.

In a move to bring more transparency into the stock market on a day-to-day basis, the Sebi may ask insurance companies to report their daily transactions in the stock market.  At present, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) come out with daily transaction reports of foreign and domestic institutional investors at the end of each trading session.   The transactions by insurance companies are clubbed with the domestic institutional investors (DIIs), which also includes transactions made by mutual funds and banks. 

The Delhi Stock Exchange, one of the oldest stock exchanges in the country, has been demutualised at an enterprise value of about Rs 212 crore which was much lower than the earlier talked about enterprise value of about Rs 400 crore at the expression of interest (EOI) stage.

Sebi has withdrawn recognition granted to the Hyderabad Stock Exchange Ltd (HSE) with effect from August 29, 2007, as it failed to dilute 51 per cent of its equity share capital to public other than shareholders. As per the Securities Contract Regulation Act, every recognised stock exchange whose scheme for corporatisation and demutualisation has been approved by Sebi has to ensure at least 51 per cent of its equity share capital is held by the general, within 24 months from the date of publication of the scheme.   Also, the Sebi has decided not to renew the recognition granted to Magadh Stock Exchange Ltd as it was found violating capital market regulations.

Sebi is set to introduce new norms to ensure higher public participation for delisting of company shares. The new rules, which are expected to be notified shortly, will require promoters to acquire at least half the public shareholding in their respective companies to become eligible for delisting.  This marks a departure from current rules that do not specify a minimum level of public participation for delisting.  Under current rules, the minimum promoter shareholding threshold for delisting a company is 90 per cent .The new delisting norms require the promoters to buy at least half the non-promoter holding, keeping the threshold limit of 90 per cent intact .For promoters holding up to 80 per cent, there will be no change in their purchase of additional shares. Those holding more than 80 per cent will have to buy more shares.                              

The UB Group’s open offer to the public for acquisition of Deccan Aviation shares (Air Deccan), will now open on September 12,nearly seven weeks after the date (July 25 ) originally announced. The revised completion schedule for the open offer has been filed with the Securities and Exchange Board of India. As per this revised schedule, the offer will commence on September 12 and close on October 1. The payment for the quantum of shares accepted will be communicated by mid-October. 

Heavy redemption in cash plans among other short-tenure debt schemes resulted in the assets of DSP Merrill Lynch Mutual Fund eroding 16.2 per cent to Rs 13,472 crore, according to data available on the Association of Mutual Funds in India . Comparatively, the fund house posted a 26 per cent rise in assets under management in July. The industry's assets last month fell 3.81 per cent to Rs 4.67 trillion. The maximum asset erosion was witnessed in the Liquidity Fund and the Liquid Plus Fund, of around 45 per cent each, due to the rise in call money rate.   In August, call rate jumped to 6-7 per cent and ended the month at an almost 5-month high of 12-15 per cent on August 21, after touching 50 per cent intraday. Also, the hike in cash reserve ratio by the Reserve Bank of India (RBI) by 50 basis points to 7 per cent effective August 4 and the removal of the Rs 3,000 crore ceiling on reverse repo tenders with effect from August 6, helped the rise in call money rate. In August, no new schemes were floated as fund managers expected the short-term rates to rise from September. DSP Merrill Lynch Savings Plus Fund was the only fund from the debt segment to register a rise in assets.

Derivatives   

It was a fairly quiet week in the futures and options market. Volumes and open interest generation was moderate but positive. FIIs expanded their exposures but not by huge amounts. Premiums did not show excessive volatility.    The spot Nifty is trading at 4509 while the September contract was settled at 4478, the October contract at 4459 and the November contract at 4443. The Nifty Junior spot closed at 8814 with the September futures settled at 8828. The CNX IT closed at 4866 with the future settled at 4846 and the Bank Nifty closed at 6843 with the future at 6849.95. 

Heightened interest in the days ahead among investors in the cash segment is forecast for the 14 stocks that were added on September 06 to the futures and options segment of the NSE.  The new entries are 3i Infotech, Aptech, Bhushan Steel & Strips, Biocon, Havell India , NIIT Technologies, Sasken Communication Technologies, Tech Mahindra, Tulip IT Services, Welspun Gujarat and YES Bank. “ These stocks now have a different status and the very fact that you can leverage your position on these stocks invites interest of investors, especially those with cash positions in these securities,” said Mr. Aalap Shah, Derivatives Research Analyst, Dolat Capital Market Pvt Ltd.The renewed interest will not hurt the share price, he added. Although some of these stocks have been in the red on the NSE and the BSE, like Havell, Tulip and Welspun, Mr Shah said that over a 10-day horizon, all stocks start making money for investors.     

Government Securities Market

Primary Market

RBI conducted the auction of 8.20 per cent 2022 and 8.33 per cent 2036 for the notified amounts of Rs.4000 crore and Rs.3,000 crore respectively. The cut-off yields for the 8.20 per cent 2022" and 8.33 per cent 2036 were 8.1571 per cent and 8.4087 per cent respectively.

The RBI will auction the 91-day and 364-day treasury bills for notified amount of Rs 3,500 crore (Rs 3,000 crore for MSS) and Rs 3,000 crore (Rs 2,000 crore for MSS). The cut-off yield on t-bills is expected to rule around similar levels as in the last week.    

The rate of interest on the Floating Rate Bonds, 2013 (FRB, 2013) applicable for the year (September 10, 2007 to September 9, 2008) shall be 7.85 per cent per annum.

Indian Oil Corporation Ltd plans to sell oil bonds worth Rs 1,500 crore to Rs 2,000 crore in October.

Secondary Market

European Central Bank policymakers left the benchmark euro zone interest rate at 4.0 per cent on September 06,taking time to assess the impact of recent trouble on global credit markets. The balance of risks was clearly tilted in favor of unchanged rates, If the situation stabilizes, (the ECB) can resume hiking next month with no meaningful impact on inflation risks. Earlier on September 06, the Bank of England left its benchmark rate unchanged at 5.75 per cent. The ECB also held its marginal lending rate, at which banks can get emergency overnight loans, steady at 5.00 per cent and kept its deposit rate at 3.00 per cent. Some money market traders had speculated that the ECB might cut its marginal rate, following the US Federal Reserve's example, to put a cap on interbank lending rates, which surged past 4.5 per cent on Wednesday.

The People's Bank of China has raised the reserve requirement ratio maintained by the commercial banks with the central bank by 50 bps to 12.5 per cent with effect from September 25, 2007.

The gilt-edged yields were stuck in narrow range amidst moderate to thin activity. Yield on 7.99 per cent 2017 bond ended on a positive note at 7.87 per cent boosted by liquidity and benign inflation. Also, the yield of the 7.49 per cent 2017 bond too hovered in a narrow range of 7.90-92 per cent. RBI set higher-than-expected cut-off price of Rs 100.35 (yield 8.15 per cent) at the 8.20 per cent 2022 bond auction.

The cut-off for the 8.33 per cent 2036 was much in line with expectations at Rs 99.13 (8.41 per cent).

The anticipated redemption of government securities this month along with inflows for subscription to initial public offering of Power Grid Corporation have led to a huge liquidity build-up in the markets. The build-up was reflected in Liquidity Adjustment Facility auction bids on September 06. There were only 19 bids for reverse repurchases, but the amount was Rs 39,175 crore.

According to the quarterly review of financial markets released by the Bank for International Settlements, global bond sales increased 31 per cent in the second quarter of 2007 to a record $1.09 trillion, driven by private-equity firms financing leveraged buyouts. The amount of debt outstanding rose to $19.8 trillion in June from $18.5 trillion in March.

Bond Market

Certificates of deposit issuances continued to flood the short-term debt market as banks raised funds ahead of advance tax outflows by mid-September. Banks issued around Rs 8.5 billion worth CDs today with different maturities.   The major investors in these CDs were mutual funds as they have excess cash, garnered through their fixed maturity plans. Demand from mutual funds could slow down on account of redemptions in liquid and debt schemes by banks and corporates to pay advance tax.

The sentiment in the secondary market for corporate bond market was subdued and the activity dipped in line with the trend of the GOI bond market. However, unlike the risk-free bonds, corporate bond yields rose leading to a widening in spreads. Only towards the end of the week, mild trading interest appeared.  AAA 5-year yield moved in a narrow range to close almost flat at 9.63 per cent from 9.60 per cent. Spreads over comparable GOI paper, too, remained unchanged at 165 bps.

Foreign Exchange Market

Overcoming a weak first half of the week, the rupee appreciated 20 paise to 40.69 per dollar. The unit touched a high of 40.68 per dollar after a gap 3-weeks on Friday. Earlier, the rupee slipped towards 41 per dollar, missing the figure by a paisa while uncertainty existed over global investment flows. The rupee, however, was displaying resilience despite sporadic selling in stocks and quickly rebounded when a batch of fresh inflows hit the market.

The rupee is likely to appreciate further. Since the non-farm payroll data released in the United States has been below expectations, all major currencies have started appreciating against the dollar. This will indirectly impact the rupee movement as well. 

Commodities Futures derivatives

Turnover at the commodity exchanges fell in the first five months of the financial year ended March 31, 2008, as trade in agricultural goods declined after the regulator banned trading in wheat and lentils. Commodities worth Rs 14.83 trillion ($365 billion) were traded on the 23 commodity exchanges between April 2 and August 31, compared with 15.63 trillion rupees a year earlier, the Forward Markets commission said today in a statement on its website.  

In a move that could align commodity futures to the spot market prices, NCDEX is planning to increase the delivery period to 10-15 days. Now, all the open positions on contract expiry day should end in a delivery. This decision is likely to narrow down the gap between futures and spot prices during the extended deliverable period as purchases could be made in the spot market and delivered on futures platform if futures prices are high.

The cumin seed (jeera) exports for the first three months of the current financial year have dropped drastically to half of their level during the first quarter of the last financial year.  According to Spices Board figures released recently, jeera exports during April-June have touched 4,000 mt as against 8,000 mt during the first three months of the last financial year. Interestingly, the Spices Board has set a target of 25,000 mt as against total exports of 26,000 mt achieved last year.    Although jeera exports have remain dismal for the first quarter, the demand for Indian jeera is expected to surge during the coming months. Despite strong production figures, the difference between spot and futures has remained high mainly due to increasing dabba trading activity in jeera.   The Unjha trading community sources said of late the difference in quality of jeera at Jodhpur and in Unjha facility of NCDEX has caused some trouble for the buyers.  The traders are reluctant to take delivery from Jodhpur facility although most traders accept Jeera from NCDEX facility in Unjha. The trading in jeera was also hit recently over the quality of the product, which ultimately prompted NCDEX to have new advisory body for the commodity.   

Corporate Sector

The amalgamation of IPCL with Reliance Industries Ltd (RIL) has come into effect from September 5, 2007.

In a strategic move to grow globally Reliance Industries (RIL) has acquired majority stake and management control of Gulf Africa Petroleum Corporation (Gapco) in East Africa . Gapco is a multinational petroleum marketing company with operations in East Africa and has 42 per cent share of a market estimated at $150 million. It has terminal facilities and retail network in East Africa . The purchase was made through a wholly owned subsidiary, Reliance Industries Middle East, a company registered in United Arab Emirates .

In order to gain a significant amount of market share in their international operations Jet Airways and Air India (AI) are planning to engage in a cooperative competition. At present Jet has around 20 per cent of the Indo-US market but with the cooperation of AI it can go up to 50 per cent.

After aerospace, oil and gas Kalyani Group is now foraying into wind energy sector. The group has acquired a 100 per cent stake in RSB consult GmbH (RSB), a German wind energy systems developer and producer. The Group has ambitious plans to target the fast growing renewable energy market.

Bajaj Auto accused TVS of copying its patented technology when it launched the Flame.  But according to TVS twin spark plugs is a known technology, in use all over the world and hence Bajaj Auto’s accusation is an attempt to muddy its image. TVS Motor Company also threatened to take Bajaj Auto to court for its wild and irresponsible allegation over patents infringement.

Sundram Fasteners, a leading auto component maker is planning a foothold in North America in order to remain physically closer to auto giants and participate in co-engineering. The TVS Group flagship, Sundram Fasteners supplies components to the likes of General Motors and Ford.

In a bid to take on its rivals in the processed foods sector in India , ITC Food is drawing up a three-pronged strategy. As a part of its inorganic growth strategy, the company is planning to acquire a slew of regional brands in southern and western India and currently in talks with major players in Gujarat and Andhra Pradesh. In order to drive volumes in an increasingly crowded market, ITC Food is increasing its ad budget by 60 per cent and to reach out to a wider target audience extending its distribution network by 20 per cent.

Telecom

The GSM capacity expansion of BSNL is now finally set to take off with the company succeeding in resolving issues relating to the tender with Sweden-based equipment vendor Ericsson.

*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.

LIST OF WEEKLY THEMES

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