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Current Economic Statistics and Review For the
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Theme
of the week:
Private Equity (PE) Investments in India: Unprecedented Growth*
The activities of Private Equity (PE) funds have recently received considerable attention, as the PE market has been an important source of funds for start-ups, firms in financial distress, private medium-size companies and firms seeking out buyout financing. In recent years, it has been the fastest growing market for corporate finance, far surpassing others such as public equity and bond market and the market for private placement debt. Definition
In corporate finance, private equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. PE’s are equity securities of private businesses (unlisted companies), which are held either through limited partnerships or as direct ownership interests. In short, PE is a broad term that commonly refers to any type of equity investment in an asset in which the equity is not freely tradable in the stock market. The purchase of shares is therefore privately negotiated. Some of the salient features of PE are as follows: 1) PE’s are generally illiquid and are long-term investments, 2) PE investments are not subject to the same high level of government regulation as stock offerings to the general public, 3) PE is generally regarded as an investment which offers investors the opportunity to achieve superior long term returns compared to traditional stock and bond investment vehicles and 4) PE funds are typically limited partnerships with a fixed term of 10 years often with annual extensions. Types of Private Equity PE investment covers a wide range of investment opportunities. It can be divided into following categories. 1) Early stage investment which includes angel investors and seed capital. (a) Angel investors – Provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. (b) Seed Capital – Capital is provided for the development of a business concept, involving the production of business plan, prototypes and initial research. 2) Take off investment which includes venture capital. (a) Venture Capital – Equity investments made, by and large in less mature companies, for the launch, early development, or expansion of a business. (b) Bridge Finance – Short term venture capital funding provided to a company generally planning to float within a year. 3) Mid-growth investment which includes mezzanine finance. (a) Mezzanine Finance – A hybrid of debt and equity financing which is normally used to finance the expansion of existing companies. (b) Leveraged Buyout – Equity investments as part of a transaction in which a business unit or business assets are acquired from the current shareholders generally with the use of financial leverage. The companies involved in these transactions are by and large more mature and generate operating cash flows. 4) Later stage investment includes growth capital. (a) Growth Capital – Refers to equity investments, most often minority investments, in more mature companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business. Other strategies that can be considered private equity or a close adjacent market include: 1) Distressed or Special situations: Investments in equity or debt securities of a distressed company, or a company where value can be unlocked as a result of a one-time opportunity. 2) Real Estate: Certain investors in private equity consider real estate to be a separate asset class. 3) Secondary investments: Refer to investments made in existing PE assets including PE fund interests or portfolios of direct investments in privately held companies through the purchase of these investments from existing institutional investors. 4) Infrastructure: Investments in various public works (e.g., bridges, tunnels, toll roads, airports, public transportation and other public works) that are made generally as part of a privatisation initiative on the part of a government entity. 5) Energy and Power: Investments in a wide variety of companies (rather than assets) engaged in the production and sale of energy, including fuel extraction, refining and distribution or companies engaged in the production or transmission of electrical power. 6) Merchant banking: Negotiated PE investment by financial institutions in the unregistered securities of either privately or publicly held companies. Return
on PE Investments In the PE investment process, the investor or the fund manager, makes a detailed appraisal of the company’s business plan and makes the investment decision only after being satisfied about its feasibility. Accordingly, a detailed contract is entered into with the investee company and its management, specifying terms and conditions of the arrangement such as – 1) Representation on the board, 2) Restriction on capital expenditure or diversification not part of the business plan on the basis of which the investment decision is being made and 3) Restriction on divestiture of management’s shareholding. Most institutional investors invest in private equity for financial reasons, specifically because they expect the risk-adjusted returns on private equity to be higher than those on other investments and because of the potential benefits of diversification. Private equity firms generally receive a return on their investments through one of the following avenues: 1) Initial Public Offering (IPO) – Shares of the company are offered to the public, providing an partial immediate realisation to the financial sponsor as well as a public market into which it can later sell additional shares; 2) A merger or acquisition – The company is sold for either cash or shares in another company and 3) Recapitalization – Cash is distributed to the shareholders and its private equity funds either from cash flow generated by the company or through raising debt or other securities to fund the distribution. PE
Investments in There has been phenomenal
growth in the value of PE investment in The investors are big institutions acting on their own, or through PE funds managed by reputed fund managers. Several such funds are managed by major international investments or commercial banks. Most of the big PE majors like Carlye Group, Blackstone Group, Warburg Pincus and Actis Partners have considerable stakes in Indian corporates. Even domestic firms like ICICI Venture Funds Management and Kotak Mahindra are stepping their PE investments. The PE investments in First Phase
(Period 1999–2003): The first phase coincided with the internet and
dotcom boom when most investments went to technology-related companies. IT
and ITeS industry, real estate sector and few pharmaceuticals companies have
received much of the PE investments. Nearly one
and half dozen PE deals of size more than $8 million were concluded since
Jan 2001 bringing $550 million as against $450 million in 15 deals in year
2000. The Indian corporate sector has received PE investments totaling $800
million in 2003. Second
phase (2004 onwards): The second phase
witnessed investments during the last three years in sectors like
infrastructure, real estate, manufacturing and power.
PE funds are aggressively investing in new sectors and moving beyond
the traditional IT and real estate companies, which were the major receivers
of growth funds in the past few years. A major reason for the explosive growth of the PE market since 2004 (second phase) has been the anticipation by institutional investors of returns substantially higher than can be earned in alternative markets. In
the year 2004, PE funds invested $1.70 billion in Indian companies, the
highest amount in the last three years. The biggest PE deal was the
acquisition of a 60 per cent stake in GE Capital International Services (GECIS)
by General Atlantic Partners and Oak Hill Capital Partners for $500 million.
According to data compiled by Grant Thornton, a global consultancy firm, the total number of PE deals announced in the year 2006 stood at 302, with a total value of $7.85 billion, against 124 deals in 2005 with a total value of $2.03 billion.
In recent years, private equity firms have been able to mobilise substantial sums of money from investors such as banks and pension funds that are looking for alternative avenues of investment outside of stock markets. In private equity arena,
2007 saw the entry of more of the large international players such as Apax
Partners. The According to Carlyle India Advisors, Managing Director, Rajeev Gupta, “PE is important for the Indian financial system because it is not only a significant provider of risk capital for Indian corporations but is also an incredibly stable source of funds. In each of the past three years, PE capital has constituted a significant proportion of the total equity capital raised by Indian corporations. Sector-wise
PE Deals in 2007 Unlike in the past when growth was led by a few sectors, 2007 has witnessed a more broadly based activity. The real estate and infrastructure sector overtook the IT and telecom industry and dominated the PE investments with a 36 per cent share in the total deal value (Chart 1). It was followed by telecom sector with a 18 per cent share, banking and finance 17 per cent, media and entertainment 5 per cent, IT and ITeS 4 per cent. One of the emerging sectors for this year has been power and energy accounting for 4 per cent of the total deal value. The major PE deals in 2007 were a $1 billion investment in GMR Infrastructure by a group of private equity investors (Eton Park Capital, Deutsche Asset Management, Capital International, Citigroup, T Rowe Price, Credit Agricole, UBS, State Bank of India, Canara Bank and Kotak Mahindra Bank) and ICICI Venture’s investment of $800 million in the Jaypee Group.
Recent
Deals of Blackstone Blackstone Group, the global equity firm, has bought 14.5 per cent stake in Hyderabad-based Nagarjuna Construction Company Ltd (NCCL) for $150 million (about Rs 615 crore), one of the largest-ever foreign investments in the construction sector in India.
PE
Investments in According to Four-S
Services report, more PE funds flocked to Value of PE Deals Surpasses Funds Raised through IPOs Interestingly, during January-April 2008, PE funds have struck 156 deals worth $4.94 billion whereas during the same period the funds raised through initial public offerings (IPOs) amounted to $3.9 billion. PE
Investments in 2008 According to Grant Thornton
report, PE funds have struck 156 PE deals worth $4.94 billion in Strong growth fundamentals
of the country will help PE investments to hit 16-billion dollar mark this
year and The IPO route of exit by PE
is generally considered as the most efficient way of exit across the world.
However, the number of exits through exercise of the IPO option in
This phenomenon can be primarily attributed to the flexibility available to PE firms to exit through other options like strategic sales i.e. sale to financial investors, competition and joint venture partners etc. However, it is interesting to note that though the total number of IPO exit may be less, many firms have chosen to exit through strategic sales via the exchange after listing (Table 3). Challenges
Ahead Currently, Indian companies are raising more capital through the PE route compared to IPOs, as PE has emerged as an attractive option for promoters owing to volatility in the stock markets. Today, for any corporation, which needs to have the certainty of being able to raise large amount of capital, PE investments are the best source. According to Rama Rao of Spark Capital, “PE is probably the single biggest factor that has changed the business scenario from a capital markets point of view”. Though PE firms have been aggressively investing in Indian companies, they face some bottlenecks. A recent survey of PE practitioners by Venture Intelligence suggests that valuations and lack of management talent are the major challenges facing PE investors. Another challenge is whether the increasing role of PE activities means that there are threats for buyouts? However, Natarajan of Venture Intelligence says that, “the Indian PE market is largely driven by growth capital and buyouts are few and far between as PE firms work with the promoters”. Despite these concerns, PE
investments in
* This note has been prepared by Bipin Deokar
References
Business Line (2005): ‘Indian corporate
finance deals – International private equity investors dominate Sharing
Spectrum’, January 17. Center for International Securities and Derivatives
Markets (CISDM) (2006): ‘The Benefits of Private Equity: 2006 Update’,
May. CDC
Capital Partners, ‘Enhancing Resource Flow: Role of Private Equity’,
April 2002. India Advisory Partners (IAP), http://www.iapib.com/ INDATA (2005): Annual Report 2004. INDATA (2006): Annual Report 2005. INDATA (2007): Annual Report 2006. INDATA (2008): Annual Report 2007. The
Financial Express (2008): ‘PE investments to hit US$ 16 billion in
2008’, May 13. The
Financial Express (2008): ‘Betting on Ludovic Phalippou & Maurizio Zollo (2005):
‘What Drives Private Equity Fund Performance?’, November. Prowse
Stephen, The Economies of the Private Equity Market’, Federal Reserve Bank
of
Rajwade
, A V (2004): Foreign Exchange International Finance Risk Management, New
Revised 4th Edition, Published by
Highlights of Current Economic Scene AGRICULTURE The central government’s rice procurement as on
June 3, 2008 has been registered at 25.2 million tonnes outstripping both
last season's as well as last year’s procurement of 25.1 million tonnes
and 23.2 million tonnes, respectively. The Food Corporation of India (FCI)
expects that total procurement of rice would be 27.5 million tonnes by
September 2008. Rice procurement is going on in some regions of Andhra
Pradesh, Orissa, West Bengal and Chhattisgarh and it is likely to exceed
the earlier record of 27.6 million tonnes attained in 2005-06, by the end
of whole season. Rice procurement, during the current season, has
increased in all major rice producing states compared to previous season
except Haryana. Indian Meteorological Department (IMD) in
collaboration with agricultural universities across the country would soon
be introducing district specific agro-weather advisories to boost
agricultural produce and reduce losses due to the vagaries of nature.
Currently, they are providing information from over 40 stations but soon
they would be disseminating information from 127 centres (Kisan Vikas
Kendra’s and agricultural universities). It is expected that this would
cut down the error margin and benefit the farmers most. As per the report submitted by several agencies to
the central government, overall sugar production in the country during the
sugar season (October-March) 2008-09 is expected to decline at 225 lakh
tonnes, showing a fall of 25 per cent against estimated sugar production
of 265 lakh tonnes in the crushing period of 2007-08. It is expected that
lower acreage under sugarcane across the country would lead to lower
production. The National Agriculture Cooperative Federation of
India (NAFED) has slashed the minimum export price (MEP) for onion by US $
25 per tonne, as there is huge availability of onion in the
domestic market and price realisations by farmers is low. This move has
been made applicable for the shipments undertaken from June. After
revision, onion MEP (cost & freight) now stands at US $ 155 per tonne
for break bulk category and US $160 per tonne in container shipments for
destinations likes The Directorate General of Foreign Trade (DGFT) has
issued a notification on June 4 2008, permitting import of the arecanut
with c.i.f (cost, insurance and freight) value at Rs 35 per kg and above.
With this move there would be no scope for undervaluing of the commodity
while importing it in the country. Fertilisers and Chemicals Travancore (FACT), the
producer of chemical fertilisers in Kerala, has stopped production since
few months due to sharp increase in the prices of sulphur. This has
resulted in a serious shortage of chemical fertilisers in Kerala and other
southern states. This has worstly affected the cardamom flowering, as it
is located in the hilly areas of idukki district of Kerala and
transportation is too expensive. As per some of the cardamom growers,
major chunk of available fertilisers has gone to other crops such as
pineapple, with growing areas located near According to the Coffee Board, Indian coffee exports
(permit issued) during January
- May 2008, have seen an upsurge of 3.57 per cent to 110,796 tonnes as
against last year's exports of 106,970 tonnes. Of the total exports,
arabica parchment constituted 23,798 tonnes (16,316 tonnes last year),
arabica cherry 4,829 tonnes (6,617 tonnes), robusta parchment 9,757 tonnes
(10,802 tonnes), robusta cherry 46,230 tonnes (46,144 tonnes) and instant
coffee 26,182 tonnes (27,091 tonnes). Re-exports have stood at 11,191
tonnes (provisional) as against 6,023 tonnes in the same period last year.
It is reported that prices of robusta parchment have been higher than that
of the arabica parchment for the first time since 1996-97. According to the Rubber Board, As per the Spices Board, short supplies of pepper
worldwide have created market buoyancy and competitive suppliers like
Vietnam chose cautious selling, due to which exports from India has
obtained Rs 213.30 crore in 2007-08 over the previous fiscal year.
Importers have purchased 35,000 tonnes of Indian pepper at an average
price of Rs 148.43 per kg against 28,750 tonnes at Rs 106.50 in the
previous fiscal. Consequently,
According to the latest estimates by International
Cotton Advisory Committee (ICAC), the season-average Cotlook A Index in
2008-09 would be 79 cent per pound, 6 cents higher than the expected
2007-08 average. While cotton prices across the world are expected to be
higher in 2008-09, due to decline in stocks to mill use ratio at the
global level excluding As per the estimates by state government of Himachal
Pradesh, production of apple crop would decline by about 14 per cent this
year as compared with last year due to intermittent rains in May and
hailstorms in April. While production in Kullu alone is expected to
decline from 7 million boxes to 4.9 million boxes. After a bumper harvest
in November 2007, state has produced 29.2 million boxes of apple weighing
20 kg each; this year the production is expected to be lower by four
million boxes. Last year, the production of apple was1.5 million tonnes. The government of Andhra Pradesh would be providing
agricultural tools worth Rs 500 crore to farmers during the kharif season,
of which the subsidy component would be Rs 200 crore. The state government
has sent proposals to Mahindra & Mahindra for the production of farm
tools such as tillers, sprayers, cutting machines and other inputs. Escorts Ltd. has introduced personal accident cover
for farmers on purchase of tractors from May 1, 2008. This includes
insurance cover ranging from Rs 3 lakh to Rs 7 lakh. Escort’s tractors
ranging from 40-60 HP, 35-39 HP and 27-34 HP would carry a cover of Rs 7
lakh, Rs 5 lakh and Rs 3 lakh, respectively, for one year from the date of
delivery. Mother Dairy Fruit & Vegetable Private Ltd. (MDFVPL)
has hiked the retail price of only full-cream milk, containing 6 per cent
fat and 9 per cent solids-not-fat (SNF), by Rs 1 per litre in the National
Capital Region. While, toned milk (3 per cent fat and 8.5 per cent SNF)
rates have been left unchanged. This is sixth consecutive increase
undertaken by the company since 2006. Industry The
General Index stands at 268.3, which is 7.0% higher as compared to the
level in the month of April 2007. The revised annual growth for the period
April-March 2007-08 stands at 8.3% over the corresponding period of the
previous year. The
Indices of Industrial Production for the Mining, Manufacturing and
Electricity sectors for the month of April 2008 stand at 175.0, 287.0, and
218.2 respectively, with the corresponding growth rates of 8.6%, 7.5% and
1.4% as compared to April 2007. The
revised annual growth in the three sectors during April-March, 2007-08
over the corresponding period of 2006-07 has been 5.1%, 8.7% and 6.4%
respectively, which moved the overall growth in the General Index to 8.3%.
As
per 2-digit classification, as many as fourteen (14) out of the seventeen
(17) industry groups have shown positive growth during the month of April
2008 as compared to the corresponding month of the previous year. The
industry group ‘Beverages, Tobacco and Related Products’ have shown
the highest growth of 30.7%, followed by 15.4% in ‘Basic Chemicals &
Chemical Products (except products of Petroleum & Coal)’ and 11.4%
in ‘Transport Equipment and Parts’. On the other hand, the industry
group ‘Jute and Other Vegetables Fibre Textile (except Cotton)’ have
shown a negative growth of 9.9% followed by 6.3% in ‘Food Products’
and 2.0% in ‘Textile Products (including Wearing Apparel)’. As
per Use-based classification, the Sectoral growth rates in April 2008 over
April 2007 are 4.6% in Basic goods, 14.2% in Capital goods and 4.2% in
Intermediate goods. The Consumer durables and Consumer non-durables have
recorded growth of 5.5% and 9.8% respectively, with the overall growth in
Consumer goods being 8.9%. Infrastructure Riding
on the back of good performance of coal, steel and cement the index of six
core infrastructure industries having a combined weight of 26.7 per cent
in the index of industrial production with base 1993-94 registered a
growth of 9.6 per cent during March 2008 as compared to 10.5 per cent in
March 2007. This impressive performance exhibited by
the core industries in
MArch 2008 resulting the core index registering a growth of 5.6 per cent
during the fiscal so far as against 9.2 last year. Steel and cement
witnessed better performance during March 2008 compared to January
2008 and also March 2007. Inflation The
annual rate of inflation calculated on a point-to-point basis, rose by
8.24 per cent for the week ended May 24,2008 as compared 5.15 per cent as
on May 26,2007. Rise
of 0.2 per cent in the index of Primary Articles group during the week can
be attributed to increase in prices of non-food articles, which rose by
0.5 per cent. The
index for the major group Fuel, Power, Light and Lubricants remained at
previous weeks level. Marginal
rise in the price index of manufactured products was due to the increase
in the prices of rice bran oil, groundnut oil, and gingelly oil. The
final WPI for all commodities had been revised upward from 226.0 to 226.7
for the week ended March 29,2008. As a result the rate of inflation
calculated on a point-to-point basis stood at 7.75 per cent as compared to
7.41 percent provisional. Linked CPI (UNME) The Consumer Price Index for Urban Non-Manual
Employees [CPI (UNME)] numbers on base 1984-85=100 in respect of 59 urban
centres and all -India up to March, 2008 were compiled and released by the
Central Statistical Organisation, Ministry of Statistics and Programme
Implementation. Because of
outdated base year and also deployment of field investigators for
collection of price data for a broad based CPI (Urban) number, the
National Statistical Commission in its meeting held on 15.2.2008 decided
to: (i) discontinue the CPI (UNME) and (ii) adopt link index, based on ratio method after aggregating
the sub group level indices of Labour Bureau’s CPI (Industrial Workers)
using CPI (UNME) weights at group/sub-group level for all Compile linked CPI(UNME) numbers till new series of
CPI(Urban) is brought out In pursuance of the National Statistical
Commission’s recommendation, price collection for CPI (UNME) was
discontinued with effect from April 2008. The linked all- India CPI (UNME)
numbers based on sub-group level indices of CPI (Industrial Workers) using
CPI (UNME) weights at group/sub-group level for all Banking The Foreign Investment Promotion Board (FIPB),
the nodal statutory body to approve foreign direct investment in the
country, has given its nod to a proposal from Deutsche Bank to buy a five
per cent stake in the Delhi Stock Exchange (DSE). However, the bank would
be able to acquire the stakes only if the existing shareholder would be
willing to sell. According to the demutualisation norms of SEBI, DSE has
to offload a minimum of 51 per cent stake, out of which maximum 26 per
cent can be sold to foreign investors. Further, no single foreign investor
can buy more than 5 per cent stake. RBI has displayed its intention to use
the foreign exchange reserves to manage the oil shock but refused to
accord SLR status to oil bonds. An SLR status would help the oil companies
make oil bonds more attractive for purchase by the banks. RBI has barred the Sahara India Financial
Corporation (SIFC) from accepting public deposits. The bank cited
continuous violations of the requirements and guidelines by the residuary
non-banking financial corporation (NBFC) as the reason for the ban. This,
in effect, means that the SIFC can neither accept fresh deposits nor renew
deposits it has raised from over 42.5 million depositors. SIFC is the
largest residuary-NBFC in the country with over Rs 10,000 crore as
deposits. The bank has also directed SIFC to repay the deposits as and
when they mature. However, the SIFC has already secured a stay on the ban
from the NABARD will open a special liquidity
assistance window for co-operative credit institutions, including state
cooperative banks (SCBs) to help them handle any tight resource condition
arising out of implementation of the farm debt relief scheme. The RBI, as a part of the bailout package
for the oil companies suffering from huge under recoveries in the
business, has allowed domestic oil refiners to hedge their petroleum
products’ sale and domestic crude purchase on foreign commodity
exchanges. The RBI has proposed to tighten the
capital adequacy norms for the NBFCs that have an asset size of more than
Rs 100 crore besides seeking additional disclosures on derivatives and
exposure to the real estate sector. After an immediate raise of CAR from
10 to 12 per cent, it is proposed to be raised to 15 per cent from April
2009. Public Finance Government
after introducing stringent austerity measures to control wasteful
spending are eyeing higher collections from direct taxes. Budget estimates
of direct taxes was Rs. 365,000 crore which are revised now to Rs. 400,000
crores. This is done because the actual collection during 2007-08 was Rs.
314,468 crore and even a 25 per cent increase over this is justifiable
opined finance minister. The collection has tripled from Rs. 105,088 crore
in 2003-04, and at the same time cost of tax collection came down to 0.54
per cent the lowest in any jurisdiction in the world. Tax deduction at
source (51 per cent), advance taxes (33.6 per cent) and self-assessment
tax (62 per cent) all witnessed increases.
He also said that the proposed income tax code which will replace
the age old income tax act is ready and the discussion paper is being
written. Financial Sector Capital
Markets Primary
Market According to a study conducted by New Delhi based SMC
Investment Solutions & Services, private equity (PE) investors
received a record $19.5 billion exposure in India, significantly higher
than the $12.8 billion in China. In this segment, the pre-initial public
offer (IPO) market seems to have been the stellar area where investments
made in 2007, and marked-to-market till end of May, have seen the deals
generate a 128.3 per cent return. In 2007, there were around 15 pre-IPO
deals, of which, 10 have registered gains as of May end and 5 are in the
red. PE funds like ICICI Venture, T Rowe Price, 3i, IDFC and GIC have
gained from investing in the Mundra Port SEZ IPO. As per the report,
initial investments worth $208.9 million are now worth $701.50 million.
However, the pre-IPO segment remains the smallest of avenues preferred by
PE players accounting for around $500 million investments in 2007. It is
the IPO market, which saw maximum investments in 2007 - pegged at around
$8.31 billion. In addition, this segment saw average returns being around
22.14 per cent, and around 43 per cent of the 106 deals have clogged
positive returns, says the SMC Investments report. Here, PowerGrid and Lotus Eye Care Hospital Ltd is to enter the capital
market through an IPO of one crore equity shares of Rs 10 each. The
company plans to raise a total of Rs 42 crore at the upper end of the
price band, which has been set between Rs 38 and Rs 42. The issue will be
open for subscription from June 12 to June 17. The company plans to set up
two primary eye care centres in First Winner Industries, a company engaged in the
manufacture of grey fabrics and trading of textile fabrics, which are
supplied to wholesalers and garment manufacturers, entered the capital
market with an IPO of 55 lakh equity shares of Rs 10 each. The issue
opened on June 9, and will close on June 12. The price band for the issue
has been fixed between Rs 120 and Rs 130. The company plans to raise Rs
71.50 crore at the upper price band. The issue will comprise of an
employee reservation of one lakh equity shares and the net issue to the
public will be 54 lakh equity shares. Avon Weighing Systems, which assembles and sells
weighing instruments in Secondary Market The market crashed during the week following a 10 per
cent hike in fuel prices and the possibility of a double-digit inflation
saw the BSE sensex drop 5 per cent to 15,572 for the week ended June 06,
2008. The NSE Nifty shed 242.3 points or 5 per cent to end at 4,627 for
the week. The Defty declined by 5.57 per cent as the rupee slid again.
Most smaller stocks underperformed the Nifty. The CNX Nifty Junior down by
6.97 per cent, while the BSE 500 fell by 5.65 per cent. The Midcaps lost
amounts that are even more disproportionate and ended 7.5 per cent down. All the sectoral indices of BSE plunged during the
week. BSE-Reality has been fallen the highest by 11.4 per cent.
Expectations of an interest rate hike by the central bank to contain the
inflation rise, which soared to 8.24 per cent for the week ended May 24,
2008, led the reality and banking scrips tumbling. While profit booking by
institutional investors restricted the gains on metals and mining scrips. According to Securities & Exchange Board of India
(SEBI) chairman CB Bhave, securities market regulators across the world
are working on evolving common standards that minimise the need for
registration in every country, so that the companies listed on the
domestic bourses will not have to file a separate prospectus to list on
stock markets abroad. The idea of common standards has been discussed at
meetings of International Organisation of Securities Commission (IOSCO),
of which On June 06,2008, SEBI reviewed the External
Commercial Borrowing (ECB) policy and has increased the cumulative debt
investment limits from $3.2 billion to $5 billion and $1.5 billion to $3
billion for FII investments in Government Securities and Corporate Debt,
respectively. According to the circular, the enhanced limits shall be
allocated among the FIIs on a ‘first come first served’ basis. In a
major relaxation of overseas borrowing norms, the government had made it
easier for domestic Companies to raise external commercial borrowings (ECBs)
and repatriate larger chunks of these funds to In the midst of a volatile equity market, the asset
under management (AUM) of the mutual fund (MF) industry gained 5.4 per
cent or Rs 30,576.72 crore in May as compared to April. According to fund
mangers, fund houses, mobilising resources through liquid funds and fixed
maturity plan (FMP’s) mainly contributed for the growth of AUM.
According to Association of Mutual Funds in Mutual fund schemes, which listed duing the year
2008, are virtually howling because of the stock markets which have been
plunged more than 25 per cent from their January peak. A majority of these
funds' NAV (net asset value) are trading below their listing NAVs. While
it has shattered the hopes of investors who put in money with much
enthusiasm in new fund offers (NFOs), it has also led to a waning response
for some of the NFOs that closed recently. The main reason for the shock
is that almost every sector has been knocked down in the current market
crash. For those who invest during the NFO period to get units cheaply, it
is probably the worst time. They would have to wait for the NAVs to turn
northbound again before disposing of their holdings. Alternatively, they
would have to invest further and bring down their average cost. According
to Jaideep Bhattacharya, chief marketing officer, UTI mutual fund,
"While free-fall in markets is clearly the reason, a lot of these
funds would be holding cash as well. NFOs are getting weak response
because no fresh money is coming in. Though investors have not redeemed
their assets, but they have not come in a big way either purely because
sentiment in market is still gloomy." Derivatives Market
There have been marginal increases in volume in the
futures market, but these have been associated with a large increase in
open interest. The Nifty options put-call ratio is around 1.5 in terms of
open interest (OI) and that is mildly oversold, but only at the upper end
of the "normal" zone. The Vix is at 26, which is also mid-zone
and neutral. The vast majority of stocks have lost ground during the week
and the majority looks as though the bearishness will continue. Other
indices, except for the CNX IT, have lost even more ground than the Nifty.
The futures market overloaded with downtrending
stocks that offer attractive short positions. There are very few scrips
apparently capable of moving up. It is more a question of finding stocks
that have bottomed versus stocks that are still going south.
Government Securities Market Primary Market On June 04, 2008, Reserve Bank of India (RBI)
auctioned 91-day and 364-day T-bills for the notified amounts of Rs.3,000
crore and Rs.1,000 crore, respectively. The cut-off yields for 91-day and
364-day T-bills were 7.56 per cent and 7.61 per cent, respectively. The RBI, on June 06, 2008, re-issued 8.24 per cent
2018 and 7.95 per cent 2032 for notified amounts of Rs.6,000 crore and
4,000 crore at the cut-off yields of 8.26 per cent and 8.72 per cent,
respectively. Secondary Market Inter-bank call rates eased during the week and ruled
in a range of 6-6.10 per cent, as against a range of above 7 per cent in
the previous week. Banks appeared to have covered their fortnightly
positions well in advance, ahead of the bond auctions while government
spending helped liquidity to improve. Bond yields spiraled on the back of
galloping inflation and soaring international oil prices. The weighted
average YTM on ten-year papers reflected the hardening trend and moved up
to 8.27 per cent up by 12 basis points over the previous weekend. Volumes
remained thin as insurance companies stayed away anticipating further
hardening of yields. Daily trade volumes averaged about Rs 2,700 crore. At
the LAF auctions, the recourse has been mainly to the reverse repurchase
window of the RBI. The mop-up through the reverse repo window was Rs
22,025 crore during the week. This has been largely on account of deposit
accretions and redemption of T-Bills and coupon flows that amounted to
about Rs 6,500 crore on previous week. In a bid to prevent any financial irregularities and
make the non-banking financial companies (NBFCs) safer, RBI asked
non-deposit taking NBFCs to raise the minimum capital to risk-weighted
assets ratio (CRAR) from 10 per cent now to 12 per cent with immediate
effect and further to 15 per cent with effect from April 1, 2009. Bond Market Rural Electrification Corp Ltd tapped the market by
issuance of bonds to mobilize Rs 500 crore by offering 9.68 per cent for
10 years. The bond has been rated AAA by Crisil and Fitch. Power Finance Corp Ltd tapped the market by issuing
bonds to mobilize Rs 500 crore by offering 9.55 per cent, 9.60 per cent
and 9.68 per cent for 3,5 and 10 years, respectively. Crisil and Icra have
rated the bond AAA RBI has been set rate of interest for floating rate
bonds maturing in 2009 at 7.51 per cent per annum on June 04,2008. The
rate of interest is applicable from June 06, 2008 to December 05, 2008. In addition to hike in fuel prices and duty cuts,
cash-strapped oil companies have got a relief on liquidity front through
RBI's recent move to buy oil bonds, which would help these companies
import sufficient quantity of crude. With the view to addressing liquidity
problem effectively, RBI and oil companies have entered into an
arrangement on June 03, 2008, as per which the oil bonds will be disposed
by companies in favour of the central bank. After accepting the bonds, the
RBI would give dollars to these companies subject to a maximum of Rs 1,000
crore a day for importing crude oil. The implementation of Basel II has provided a huge
bonanza for the rating agencies in the country. All the four agencies
Crisil, ICRA, Care and Fitch have witnessed substantial acceleration in
their core activities since the Reserve Bank of India (RBI) has asked
Indian banks to go for ratings of their loans by an independent rating
agency. Foreign Exchange Market The rupee depreciated during the volatile week at Rs 42.67 per dollar from Rs 42.47. Forward premia remained wide at the short end with importers taking cover. Premia for 1 and 3 months widened to 4.21 per cent (3.38 per cent on May 30) and 2.99 per cent (2.44 per cent) respectively. While, forward premia remained steady for 6 and 12 months at 2.15 per cent (2.3 per cent) and 1.78 per cent (1.74 per cent). Currency Derivatives The latest report published by Fitch Ratings
indicates that small to medium enterprises account for about 25 per cent
of mark-to-market (MTM) losses booked in ‘structured’ and ‘exotic’
foreign exchange (FX) derivative contracts entered by the Indian
corporates. The report also suggests that some of these contracts could
turn into actual losses for the banks because of defaults or disputes with
the corporates. As far as large corporates are concerned, the likelihood
of default due to such contracts, expected to be low in spite of high
concentration of risk. Fitch has reviewed the potential counter party
credit exposure that the Indian banking system may face due to MTM losses
in derivative transactions by the corporates and has estimated the current
MTM losses on FX derivatives in the range of $3-3.5 billion. Commodities Futures derivatives In a move to improve corporate governance in
commodity exchanges, commodity market regulator Forward Markets Commission
(FMC) will frame new rules on appointment of directors and tenure of board
members in these entities. The appointment of independent directors will
also need the approval of FMC, which has suggested a maximum tenure of two
terms of three years each. The regulator has begun discussions with the
national exchanges — Multi Commodity Exchange (MCX), National Commodity
& Derivatives Exchange (NCDEX), and National Multi Commodity Exchange
(NMCE), to define guidelines for appointment on the board of exchanges.
According to Prabhakar R Patil, director, FMC, the guidelines could be
announced in the next few weeks and the proposed provisions is expected to
instil better governance as all important decisions will be ratified by
the boards, unlike the existing practice where a committee appointed by
the board can also take decisions. Exactly a month after the Union government suspended
futures trade in refined soyaoil, potato, chickpea (chana) and rubber for
four months to control inflation, no commodity apart from potato has shown
significant dip in prices. According to the spot market data collected
from NCDEX and private traders, refined soyaoil spot market prices, which
blamed for the spurt in edible oil prices, has risen by almost 11 per cent
since futures were suspended. The prices of rubber, mostly used by tyre
makers, has risen by more than 12 per cent since the suspension of futures
trading has been announced by the FMC on May 6, 2008. Potato prices in the
spot market have dipped by around 12 per cent in the last one month,
mainly due to bumper output. While chickpeas prices have largely remained
flat because of increase in production. Despite ban in futures trading of four agricultural
commodities- rice, tur, urad and wheat in place for more than a year, the
trading volume of 22 commodity exchanges across the country has grown by
more than 13 per cent in comparison to last financial year. According to
data released by FMC the regulator for the commodities exchanges, on June
02, 2008, the trading volume of all the commodity exchanges for the
fortnight during 1st May to 15th May 2008, rose to Rs 1,68,814 crore from
Rs 1,48,104 crore recorded during the same fortnight last fiscal. Even the
cumulative value of trade in commexes during the first fortnight of May
during the current fiscal grew to Rs 5,06,629 crore from Rs 4,59,929 crore
reported during the same period last fiscal, a rise of more than 10 per
cent. During the fortnight, out of 24 commodities traded in MCX, gold,
crude oil and silver had the highest volume. The gold has been traded at
the highest Rs 12,155 per 10 grams on May 15, 2008 while the gold dipped
to lowest rate at Rs 11,155 per 10 grams on May 2, 2008. NCDEX, guar seed,
RM seed and jeera had the highest volumes of trade out 28 commodities. In
the NCDEX, jeera has been traded at highest at Rs 11,340 per 100 kg on May
07, 2008, while the lowest price has been at Rs 10,101 on May 2, 2008. In
the Ahmedabad based NMCE, out of nine volumes traded, sacking, mustard
seed and Isabgul seed had the highest volume. The FMC which complies data
every fortnight said that the MCX reported a turnover of Rs 1,44,344 crore
while NCDEX recorded a business of Rs 20,490 crore. According to a new edition of International Financial
Services London (IFSL)’s commodities trading report, global physical and
derivative trading of commodities on exchanges increased more than a third
in 2007 to reach a record 1,684 million contracts. In terms of the number
of futures contracts traded in 2007, In order to enable domestic crude oil refining
companies to hedge their risk exposures, RBI has decided to permit them to
hedge their commodity price risk on domestic purchase of crude oil and
sale of petroleum products on the basis of underlying contracts linked to
international prices on overseas exchanges or markets. The hedging will be
allowed strictly on the basis of underlying contracts. On June 06, 2008, MCX re-launched Kandla
delivery-based crude palm oil futures. According to MCX officials, the
contracts were redesigned to suit importers’ needs. The MCX contract is
Kandla delivery-based as most of the imports come through this port. The
trading unit is 10 tonne, while the daily initial fluctuation limit is 2
per cent and final fluctuation allowed is 4 per cent. The bourse offered
July, August and September as the initial contracts of trade. Corporate Sector Jindal Steel and Power is planning to build an Rs
5,000 crore thermal power plant in Orissa. The company plans to build a
1,080 MW, coal-fired captive power plant to fuel its 6-million tonne (mt),
proposed Orissa steel plant. Kirloskar Brothers, a global water management
solutions company, is reorganising its business structure. The overall
business would be regrouped into nine business sectors, dealing in
products, services and systems. Nissan, Japan’s third largest car maker
in which Renault holds 44 per cent stake has decided to produce the next
generation Micra, a small car sold in European and Pacific countries, in
Chennai, along with notified markets. External
Sector Exports during April 2008 were US $ 14400 million as against US $ 10953
million registering a growth of 31.5 per cent. As against this Imports was
valued at US $ 24274 million as against US$ 17769 million recording a
growth of 36.6 per cent. In rupee terms, while export increased by 24.8 per cent , import flared
up by 29.7 per cent. As a result trade deficit was estimated at US $ 9874 in April 2008
million higher than the deficit at US $ 6817 million during April 2007 Oil imports were estimated during April 2008 US$ 8029 million
and non-oil imports at US $ 16245 million was 46.2 per cent and
32.3 per cent higher than that in last year Telcom UAE based telecom service provider
Emirates Telecommunications Corporation (Etisalat) has pulled out of the
negotiations to acquire a stake in the Indian telecom company Spice
Communications, citing high valuation. Etisalat is the largest telecom
company in Datacom Solutions has issued Rs 15,000 crore bid from
suppliers like Alcatel-Lucent, Nokia-Siemens and Motorola for installing
70 million GSM lines in the country. The tender is the second largest
request for proposal in the country after Reliance Communications.
*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. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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