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Current Economic Statistics and Review For the
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Theme
of the week:
Explosive Growth in Remunerations of Company Executives: A Note *
The
present study is a continuation of the previous note on ‘Explosive
Growth in Remunerations of Executives: A Brief Note’
(March
22, 2008). Salaries of
executives in the corporate sector have become a matter of focus after the
PM’s comment on rising CEO’s salaries. Recently, there have been heated
debates over how much the Indian CEOs earn and whether their exorbitant
salaries are justified – a question that requires a value judgment. It is
beyond the scope of this note; this note has a more modest objective of
studying the extent of increases that have occurred in executive
remunerations during the past few years. Fortunately,
the Companies Act 1956 and the Companies (Particulars of Employees) Rules
1975 insist on details being published on the remunerations of directors as
well as highly paid executives in the company annual reports with details of
their remunerations received, designations, etc. As per the extant
regulations, as from the year 2002-03, the companies were expected to
provide the list of directors and executives/employees drawing an annual
remuneration of Rs 2 lakh and above. Broadly, while remunerations of
executives/employees include salaries and perks, those of CEOs and directors
of company boards should include, in addition to salaries and perks,
commissions received from their respective companies.
A
glance at the annual reports of top companies suggests that the number of
directors and executives/employees deriving remuneration at the above
cut-off point has shot up rather dramatically in recent years. The study
would involve an arduous task if some meaningful results have to be
discerned from it. We have taken this as a major long-term goal. For the
present, we have narrowed the
objective to a manageable level, that is, just to look at the available data
and prepare a preliminary review. In
view of that, we have made an attempt to find out the executives earning
more than Rs 1 crore in the financial year 2006-07. Our study shows that the
number of executives earnings annual remunerations of Rs 24 lakh and above
from the listed companies alone would run to thousands.
Instead, we have noticed that as per a list published in the leading
financial magazine, ‘Business India’, in its December 2007 issue. There
were arise around 600 executives earning over Rs 1 crore each in a sample of
list. Accordingly, in the present study, we have listed these executives and
tried to trace their presence in the initial year 2002-03 as well as in the
terminal year 2006-07. The task
has turned out to be very arduous. Our exercise has yielded a more modest
result. We have been able to
spot 277 executives who were drawing Rs 1 crore or more per annum as
remuneration per annum in 2006-07 and who were employed in 151 companies;
for them we have got the remuneration data for the year 2002-03. Even
in undertaking this study, we have faced a number of problems. The foremost
of them has been the frequent changes in jobs and a shift from companies by
the executive class and therefore, it has been extremely difficult to locate
individuals serving in different companies during the last few years. The
second problem has been that some executives have served some companies for
part of a year and hence their full annual remuneration is not found. Third,
there are a number of family concerns in which top executives constitute a
part of the family-owning categories, in whose case it has been difficult to
make a distinction between pure remuneration and board determined
commissions. Nevertheless,
we could get the names of 277 executives found to be common in both the
years 2002-03 and 2006-07. Taking this group of 277 executives as the
benchmark, we have listed them in the descending order of their remuneration
as per the year 2006-07 and tried to examine the trends in their
remunerations. This study, therefore, consists the remuneration packages of
these 277 executives in the two different points namely, 2002-03 and 2006-07
based on concrete data published in the annual reports of their respective
companies. For an optical view of the names of the executives, companies for
which they were working in 2006-07, their designation and remunerations
received by them in the two years have been displayed in Appendix A
accompanying this note. Mindboggling
Expansion in Remunerations In
the year 2002-03, the aggregate annual remuneration paid to the foresaid
top 277 executives of 151 major companies was around Rs 241 crore
which rose to Rs 791 crore in 2006-07, registering a sharp expansion of Rs
550 crore or by 228 per cent in four years (Table 1). That is at the rate of
34.6 per cent per annum. A
cursory look at the data for the individual years suggests that the bulk of
the rise has taken place in the years 2005-06 and 2006-07.
Table
2 indicates the distribution of executives by range of increases in
remuneration. It shows that 122 executives or over 44 per cent have received
remuneration increases beyond 250 per cent in four years.
Annual remuneration of 21 executives has been augmented in the range
of 501-1000 per cent and pay packages of 56 executives have increased in the
range of 250-500 per cent in 2006-07 as against their annual salaries in
2002-03. Around 45 executives have received hefty pay packages in 2006-07 on
account of explosive growth of more than 1000 per cent in their annual
remuneration compared to their earnings in 2002-03.
The
explosive nature of the increases in remunerations in recent years is also
brought out by the fact that of the 277 executives drawing more than Rs 1
crore per annum in 2006-07, only 67 executives were similarly earning more
than Rs 1 crore per annum in 2002-03 (Table 3).
As
per the present study, in 2002-03 there was not a single executive being
paid more than Rs 10 crore, whereas owing to dramatic increases in CEOs
salaries in recent years, there were 10 executives earning above Rs 10 crore
per annum in 2006-07, of which two executives earned more than 20 crore each
(Table 3). Table
4 presents the classification of 277 executives by their salary range in
2006-07 as well as the additions to their remunerations in four years after
2002-03. It is found that 156 executives getting remunerations of Rs 1 crore
to Rs 2 crore each had earned a total salary of Rs 88 crore in 2002-03 but
their total earnings shot up to Rs 219 crore in 2006-07 – an increase of
148 per cent. The largest increase of 2,747 per cent has taken place in the
remunerations of two executives falling in the range of Rs 20 crore and
above. The next increase (343 per cent) has taken place in respect of 26
executives who fall in the income bracket of Rs 5 crore to Rs 10 crore;
their earnings have galloped from Rs 37 crore in 2002-03 to Rs 165 crore in
2006-07.
Chairman
and Managing Director (CMD) of Reliance Industries’ Mukesh Ambani, tops
the list, with a compensation of Rs 30 crore followed by P R
Ramasubrahmaneya Rajha, CMD of Madras Cement with a pay package of Rs 25
crore. Interestingly, Rajha’s base salary is only Rs 24 lakh while the
commission paid is Rs 24 crore on account of surge in company’s net profit
by 290 per cent to Rs 308 crore in 2006-07 as against Rs 79 crore in
2005-06. The CMD of Madras Cement was awarded 5 per cent of the net profit
of Rs 495*
crore, amounting to Rs 24 crore, in accordance with the section guidelines.
According to statutory guidelines given by the Companies Act of 1959,
commissions can be as high as 10 per cent of company’s net profit. Interestingly,
out of the total 277 executives under review only four CEOs have received
lower annual remuneration in 2006-07 as compared to their pay package in
2002-03. As indicated in Table 5, the aggregate remuneration of the four
executive have declined by 24 per cent to Rs 622 crore in 2006-07 as against
Rs 820 crore in 2002-03.
Issues Monisha
Advani, CEO, Emmary HR, argues that, “Linking compensation to output is a
move towards making executives more accountable.” So far, Indian companies
haven’t placed as great emphasis on variable pay as elsewhere in the
world. Share holders, Government
and all other stakeholders need to look into the matter and take necessary
steps, such as linking the managerial remuneration with the long term
performance of the company and not just linking it to the firms’ net
profits. Likewise, suitable provisions have to be incorporated in the Indian
Companies Act so that managerial personnel would become more accountable to
their acts of commissions and omissions. There
is also the larger question of governance under which remuneration increases
to have some link with the companies’ overall performance including the
proportionate increases extended in the remunerations of the general
employees. *
This
note is prepared by Bipin K Deokar with help from Anita Prabhu for tables.
* Computation of net profits in accordance with Section 349 of the Companies Act, 1956, for the purpose of calculating Managing Director’s remuneration for the year ended 31-3-2007 Highlights of Current Economic Scene AGRICULTURE According
to Agriculture Ministry’s latest report on sowing data, released on August
01, 2008, sowings of all crops barring paddy and soyabean have continued to
trail the coverage levels achieved during the corresponding period of 2007.
Acreage under paddy in the on-going kharif season has risen to 231.32 lakh
hectares as against 207.57 lakh hectares during the same period last year.
The coverage under pulses has decreased drastically to 71.01 lakh hectares
as against 92.85 lakh hectares a year ago; this decline has been recorded
due to extended dry spell across the south peninsula regions. The sown area
under oilseed has decreased marginally to 144.31 lakh hectares, compared to
146.71 lakh hectares a year ago. Among oilseeds, soyabean is the only crop,
which has witness an increase to 87.70 lakh hectares as against 79.73 lakh
hectares last year. The decline in sowings has been largely due to the
outcome of deficient rainfall in peninsular The
central government has increased the minimum export price (MEP) of onion by
US $ 20 per tonne, i.e., around Rs 840 per tonne to US $ 255 amounting to Rs
10,710 from August 1, 2008. This decision was taken on the back to restrict
onion exports and contain its domestic prices. Onion MEP has been hiked
thrice since July 1, 2008. Market prices of onion have been rising, on the
expectation that production of onion would drop during this current kharif
season, due to erratic monsoon in onion growing regions of Maharashtra,
Andhra Pradesh and Agricultural
ministry has launched a new scheme for the distribution of palm oil packets
through the public distribution system (PDS) under national programme on
July 28, 2008. The subsidy allocated to this programme (distribution of
edible oil through PDS across the country) is Rs 1,500 crore. Andhra Pradesh
has been the first state to approach the Centre to get this benefit. Food
and Agricultural Organisation (FAO) in its latest report on world food
production and consumption, has stated that cereal production, which
includes wheat, coarse cereals and milled rice, is likely to rise by 2.8 per
cent in 2008 to a record of 2,180 million tonnes. The increase in production
is expected to be mainly on account of wheat, which is projected to be at
658 million tonnes, displaying a growth of around 8.3 per cent from 2007.
World trade in cereals in 2008-09 (July-June) is estimated to slip by 4 per
cent to 255 million tonnes, compared to 243 million tonnes last year, owing
to lower trade in maize, because of anticipated cut in imports from the
European Union.
The
central government would be procuring maize from According
to the Spices Board, total shipment of spices, in the first quarter of this
financial year, has increased by 23 per cent to 148,550 tonnes, compared to
121,180 tonnes during the same period last year. Total export earnings of
spices during the same period has gone up by 28 per cent to Rs 1,375 crore
(US $329.60 million) as against Rs 1073.50 crore (US $260.57 million) of
last year. Exports of cumin has shown a sharp increase to 15,000 tonnes, up
by 280 per cent from last year’s 3,950 tonnes, while export earnings have
increased by 253 per cent to Rs 145.81 crore from Rs 39.50 crore. Exports of
other seeds including mustard, aniseed, bishops weed, dill seed, poppy seed
have witnessed an increase at 6,750 tonnes, up by 337 per cent from 1,545
tonnes, while earnings have jumped by 409 per cent to Rs 23 crore from Rs
4.52 crore. Export of garlic has displayed a 108 per cent increase to 385
tonnes at Rs 1.05 crore as against 185 tonnes valued at Rs 92.53 lakh last
year. Exports of mint products, curry powder/paste and spice oils and
oleoresins have slowed down in the first quarter as compared to last year. A
serious setback was observed in exports of ginger with a drop of 69 per cent
to 1,050 tonnes valued at Rs 7.42 crore. Unprecedented
increase in the price of cashew nut shell liquid (CNSL) following greater
demand in the world market has pushed down its shipment during the first
quarter of the current fiscal. Exports of CNSL in April-May 2008 have stood
1,299 tonnes as against 2,102 tonnes in the same period in 2007. The average
unit value of CNSL during this year has gone up to Rs 22.13 per kg from
15.63 in 2007. It is estimated that demand for CNSL would be around 1.6 lakh
tonnes per year as it is used as furnace oil. As against this, the current
production is estimated to be at 60,000 tonnes carried out by cashew
processing units spread over Kerala, Karnataka, Tamil Nadu, Andhra Pradesh,
Tea
Board has reiterated that tea exports during the fiscal year 2007-08, have
stood at 185.32 million kg valued at Rs 1,888.68 crore at a unit realisation
of Rs 101.91 per kg. Exports of tea have declined by 32.83 million kg during
this year as compared to the previous year. This is attributed to the
decline in exports of tea to the tune of 34.87 million kg over 2006-07 to
Iraq, while there was an increase in exports to countries like Russia,
Egypt, Sri Lanka and Germany. Exports
of coir and coir-based products from the country in the first quarter of the
financial year have increased by 7.83 per cent to 45,038 tonnes from 41,766
tonnes in the corresponding quarter last year. Earnings have increased
marginally by 1.99 per cent from Rs 127.10 crore to Rs 129.64 crore during
the same period. The largest exports were seen in coir pith, at 24,435
tonnes as against 18,575 tonnes in 2007. Value realisation of this product
has increased from Rs 14.61 crore to Rs 17.65 crore, up by 21 per cent as
per latest estimates. Coir mat has registered an increase of 5 per cent to
15,956 tonnes of the total export basket, compared to 15,137 tonnes last
year. Export earnings from this item was the highest, i.e., by 7 per cent
from Rs 89.69 crore to Rs 95.64 crore. Items such as coir rugs and carpets,
coir matting and other products like coir braids, poles, bags, fender and
fancy items have performed negatively in the first quarter of the financial
year. National
Egg Coordination Committee (NECC) has appealed to the central government to
extend the ban on exports of maize to a period of one year, or at least by
six months, so that exporters would not be able to hold the stock until
exports get resume. Further, to avoid hoarding by traders, it has also
requested to impose a ceiling on the stock holding and which would continue
even after the ban is lifted. They have demanded that exports should be
canalised through a designated government agency and exports by private
traders should be banned, as they are afraid that exporters would continue
to accumulate huge stocks, which might lead to non-availability of maize to
the poultry farmers, particularly in south India and Maharashtra, and there
could be large scale mortality of birds due to starvation. It has further
appealed for an interest subvention of 8 per cent on bank loans availed by
poultry farmers, for a period of at least two years, to enable the farmers
to tide over the crisis. International
Grains Council (IGC) as on August 1, 2008 stated that favourable weather
conditions in the wheat growing nations like the European Union and US is
likely to boost the global wheat output to 662 million tonnes in 2008-09,
slightly higher than last year’s output of 658 million tonnes. The good
spell of rain have benefited crops in the key producing areas but it is
expected that delayed harvesting would put quality at risk in some parts of
the EU, Ukraine and US. The
Centre has approved Rs 231 crore to all states for implementing the National
Food Security Mission (NFSM) for pulses and rice during the ongoing kharif
sowing season. This amount includes a fresh allocation of Rs 123.02 crore
and the previous year’s unspent amount of Rs 118.95 crore. Total
allocation of Rs 231 crore would be released in the first installment for
2008-09 and the remaining amount at a later period. The statement shows that
no fresh allocation has been made for 6 states like Gujarat, Haryana,
Karnataka, Industry Index
of Industrial Production (IIP) with base 1993-94 for the month of May 2008
registered a growth of 3.8% higher as compared to the level in the month of
May 2007. The cumulative growth for the period April-May 2008-09 stands at
5.0% over the corresponding period of the pervious year. The
Mining, Manufacturing and Electricity sectors for the month of May 2008
registered growth rates of 5.2%, 3.9% and 2.0%, respectively, as compared to
May 2007. The cumulative
growth during April-May, 2008-09 over the corresponding period of 2007-08 in
the three sectors have been 5.6%, 5.3% and 1.7% respectively, which moved
the overall growth in the General Index to 5.0%.
In
terms of industries, as many as eleven (11) out of the seventeen (17)
industry groups (as per 2-digit NIC-1987) have shown positive growth during
the month of May 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 31.1%, followed by 12.3% in ‘Transport
Equipment and Parts’ and 9.5% in ‘Basic Chemicals & Chemical
Products (except products of Petroleum & Coal)’. On the other hand,
the industry group ‘Wood and Wood Products; Furniture and Fixtures’ have
shown a negative growth of 30.7% followed by 10.4% in ‘Rubber, Plastic,
Petroleum and Coal Products’ and 9.0% in ‘Jute and Other Vegetables
Fibre Textile (except Cotton)’. As
per Use-based classification, the Sectoral growth rates in May 2008 over May
2007 are 3.0% in Basic goods, 2.5% in Capital goods and 1.2% in Intermediate
goods. The Consumer durables and Consumer non-durables have recorded growth
of 4.4% and 8.1% respectively, with the overall growth in Consumer goods
being 7.2%. Infrastructure The
Index of Six core-infrastructure industries having a combined weight of 26.7
per cent in the Index of Industrial Production (IIP) (base 1993-94)
registered a growth of 3.5% (provisional) in May 2008 compared to a rise of
7.8 % in May 2007. During
April-May 2008-09, the growth of 3.5% (provisional) was almost half to that
of 6.9% during the corresponding period of the previous year. Crude
Oil production (weight of 4.17% in the IIP) registered a growth of 3.2% (provisional)
in May 2008 compared to a negative growth rate of
1.6% in May 2007. The Crude Oil production registered a growth of 2.1%
(provisional) during April-May 2008-09 as against a decline of 0.1% during
the same period of 2007-08. Growth
in Petroleum refinery production (weight
of 2.00% in the IIP) at 0.1% (provisional) in
May 2008 is miniscule compared to growth of 14.9%
in May 2007. The Petroleum refinery production registered
a growth of 2.1% (provisional) during April-May 2008-09 compared to 15.0%
during the same period of 2007-08. Impressive
growth of 8.3 per cent in coal (weight of 3.2% in the IIP) in May 2008
compared to growth rate 0.5% in May 2007 has been the only silver lining in
an otherwise bleak performance.. Coal production grew
by 9.3% (provisional) during April-May 2008-09
compared to an increase of 0.5% during the same period of 2007-08.
Electricity
generation (weight of 10.17%
in the IIP) registered a growth of 2.0% (provisional)
in May 2008 compared to a growth rate 9.3% in May 2007. Electricity generation
grew by 1.7% (provisional) during April-March
2008-09 compared to 9.0% during the same period of 2007-08. Cement
production (weight of 1.99%
in the IIP) registered a growth of 3.8% (provisional)
in May 2008 compared to 9.9% in May 2007. Cement
Production grew by 5.4% (provisional)
during April-March 2008-09 compared to an increase of 7.8% during the same
period of 2007-08. Finished
(carbon) Steel production (weight
of 5.13% in the IIP) registered a growth of 5.2% (provisional)
in May 2008 compared to 8.4% (estimated) in May
2007. Finished (carbon) Steel production grew by 4.5%
(provisional) during April-May 2008-09 compared to an increase of 5.6%
during the same period of 2007-08. Inflation The
official Wholesale Price Index for 'All Commodities' (Base: 1993-94 = 100)
for the week ended 26th July 2008 rose by 0.1 percent to 239.6
(Provisional) from 239.3 (Provisional) for the previous week. The
annual rate of inflation, calculated on point to point basis, stood at 12.01
percent (Provisional) for the week ended 26/07/2008 (over 28/07/2007) as
compared to 11.98 percent (Provisional) for the previous week. The annual
rate of inflation stood at 4.70 percent as on 28/07/2007 i.e. a year
ago. The
index of primary articles major group
rose by 0.1 percent to 247.9 (Provisional) from 247.7 (Provisional) for the
previous week. due to higher prices of moong (4%), fish-marine (2%) and
maize and condiments & spices (1% each) castor seed (6%), raw tobacco
(5%) and copra and raw cotton (2%). The
Price index of fuel, power, light and lubricants rose by 0.2 percent to
377.0 (Provisional) from 376.3 (Provisional) for the previous week due to
higher prices of furnace oil (3%). Manufactured
products major group rose by 0.1 percent to 206.1 (Provisional) from 205.9
(Provisional) for the previous week. The index for 'Food Products' group
rose by 0.1 percent to 212.8 (Provisional) from 212.6 (Provisional) for the
previous week due to higher prices of gingelly oil (3%) and gur (1%).
However, the prices of cotton seed oil (3%) and groundnut oil (2%) declined.
The
index for 'Textiles' group rose by 0.4 percent to 141.5 (Provisional) from
140.9 (Provisional) for the previous week due to higher prices of woollen
yarn (8%), woollen cloth (6%), hessian & sacking bags (2%) and cotton
yarn-'hanks (1%). The index for 'Paper & Paper Products' group rose by 0.2 percent to 200.2 (Provisional) from 199.8 (Provisional) for the previous week due to higher prices of printing paper white (1%). The
index for 'Chemicals & Chemical Products' group declined by 0.05 percent
to 222.0 (Provisional) from 222.1 (Provisional) for the previous week due to
lower prices of resins (all kinds) and acid (all kinds) (1% each). However,
the prices of caustic soda (sodium hydroxide) (1%) moved up.
The
index for 'Non-Metallic Mineral Products' group rose marginally to 215.5
(Provisional) from 215.4 (Provisional) for the previous week due to marginal
increase in the prices of cement.
The
index for 'Machinery & Machine Tools' group rose by 0.1 percent to 175.4
(Provisional) from 175.2 (Provisional) for the previous week due to higher
prices of batteries (7%) and ball bearings (1%).
Final
wholesale price index for 'All Commodities’ (Base: 1993-94=100) for the
week ended 31/05/2008,stood at 232.3 as compared to 231.1 (Provisional) and
annual rate of inflation based on final index, calculated on point to point
basis, stood at 9.32 percent as compared to 8.75 percent (Provisional).
Banking Major
mortgage lenders ICICI Bank, HDFC has raised their rates by 75 basis points
on July 29, 2008, after the RBI hiked the cash reserve ratio (CRR) by 25
basis points and repo rate by 50 bps this week. ICICI Bank has announced an
increase of 0.75 per cent in its floating reference rate (FRR) for consumer
loans (including home loans) with effect from July 31. The revised FRR will
be 14.25 per cent per annum against 13.50 per cent at present. HDFC has
revised its floating interest rates on home loans for both existing and new
customers by increasing its retail PLR. Other banks, including the state-run
Central Bank of Financial
Market Capital
Markets Primary
Markett Due
to volatile secondary market conditions, some of the public offerings have
been deferred from their plans to tap the capital market. The Bangalore
Metropolitan Transport Corporation (BMTC), the public transport operator
within Anil
Ambani group firm Reliance Infratel is likely to defer its IPO plans as the
Securities and Exchange Board of India (SEBI’s) nod for the public issue
is set to expire on August 11. This will make it the third major IPO
deferment after that of a leading commodity exchange and a mutual fund
house. The SEBI had given permission to proceed for the IPO of Reliance
Infratel, on May 12. According to the regulations, a company is required to
close the IPO within 90 days of issuance of SEBI’s observation on draft
red herring prospectos DRHP. Secondary
Market On
July 30, the SEBI has initiated reforms in the primary market with the
purpose to protect the funds of retail investors and make the existing issue
process more efficient. SEBI issued circulars to market intermediaries,
stating the decision to introduce application supported by blocked amount (ASBA)
-a supplementary process for applying in public issues. The ASBA process
will require retail investors bidding at a cut-off price to apply through
self-certified syndicate banks (SCSBs), in which they have accounts. This
process will require SCSBs to accept applications from investors, block the
funds to the extent of the bid payment amount and then upload the details in
the electronic bidding system. Once the basis of allotment is finalised, the
amount required by the issuer will be released and the rest will be
unblocked by the SCSB. Despite
serial blasts in Ahmdabad and Banglore, hawkish stance by the RBI in its
first quarter review, mixed numbers from corporate earnings and higher
inflation (11.98 per cent), the domestic markets displayed a mix of
resilience and optimism, drawing strength from the bounce in global markets.
These sentiments were further supported by a sharp decline in crude oil
prices to $123. As a result, the market gained through settlement week
albeit every session saw enormous volatility. During the week under review,
the BSE Sensex gained 2.67 per cent or 382 points and closed at 14,657. The
NSE Nifty closed at 4,414, up 2.36 per cent or 102 points The Defty gained
2.19 per cent as the rupee lost a little ground. The Nifty Junior has up
2.59 per cent. The 30-share benchmark did get a 557-points fell
on July 29, when the RBI raised the cash reserve ratio (CRR) by 25
bps effects from August 30 and repo rate by 50 bps with immediate effect at
its quarterly monetary policy review. However, the market recovered
gradually during the week, on the expectations of the reforms process would
be speeded-up and the nuclear deal operationalised. The
Ministry of Corporate Affairs has asked the SEBI to examine the lower entry
and exit loads charged by mutual fund houses in case of high networth
individuals (HNIs). The ministry has taken cognizance of a representation
made to SEBI by a public interest activist, Vijay Gokhale. Several investors
opine that mutual funds have been making a distinction between subscribers
based on their investment values. Gokhale has pleaded with SEBI saying that
it is highly detrimental and discriminating against the interests of small
investors. The
mutual funds’ average assets under management (AAUM) have dipped for the
second month in a row after banks pulled out money from liquid funds in
July. According to Association of Mutual Funds of India (amfi) the industry
registered AAUM of Rs 5,29,341 crore in July which does not include AAUM of
Taurus Mutual Fund as the data was not available on the website. The AAUM
were Rs 564,753 crore in June Rs 6,00,266 crore in May and. Compared to
May’s figures, the AAUM has shrunk by close to 12 per cent in July. On
August 01, High Level Coordination Committee (HLCC) on financial markets
under the chairmanship of Reserve Bank Governor Y V Reddy have discussed the
issue of raising cap for bringing money raised overseas by infrastructure
companies into India. The government, recently, increased the external
commercial borrowing cap to 100 million dollar for infrastructure companies
to meet the long term financing need of the sector. For other sectors, the
limit has enhanced 50 million dollar from earlier level of 20 million
dollar. RBI,
in its presentation to the visiting parliamentary standing committee on
finance chaired by Ananth Kumar, has given a detailed account of the
volatile capital over the past five years on July 28,2008. In 2003-04, the
composition of volatile capital as a percentage of reserve accretion was
40.7 per cent, while in 2004-05 it rose to 50.1 per cent. An interesting
aspect is, in 2005-06, such volatile flows even exceeded the total reserve
accretion. In fact, that year, while total accretion to the country’s
forex reserves stood at $15.5 billion, volatile capital flows were to the
tune of $16.19 billion, translating into 107.6 per cent of total reserves
accretion. Thereafter, it fell to 37.2 per cent in 2006-07. During 2007-08,
in the total forex reserves accretion of $92.16 billion, volatile capital
flows were pegged at $47.08 billion, or 51.08 per cent. RBI, submitted that
there is no definition of volatile capital flows, but can be derived as
total capital flows minus stable flows. Foreign
institutional investors were the major sellers on the local bourses in the
last six months, accounting for total outflows of Rs 62,000 crore.
Citigroup
Global Markets, Goldman Sachs Investments, HSBC, Merrill Lynch Capital
Markets, Morgan Stanley and Swiss Finance Corporations, the investment arms
of the US-based merchant bankers, pulled out Rs 35,000 crore during the
period, which is 56.5 per cent of the total withdrawals. The total outflow
figures are based on stock exchange data, while the individual FII numbers
were gleaned from the shareholding patterns of the companies concerned. The
FIIs sold shares in 355 companies between December 2007 and June 2008. They
held more than one per cent in these companies in December 2007, but the
stake slid below one per cent by June 30 2008. Citigroup, which reported
around losses of $18 billion in the sub-prime crisis, reduced its holdings
in 47 companies to below one per cent in the last six months. It sold shares
of NIIT, Idea Cellular, HCL Technologies, Jet Airways, Bharti Airtel and
Suzlon Energy during the period (Table 1). Derivatives The
settlement in derivative market witnessed excellent carryover and rising
prices despite extreme volatility during the week. The FIIs substantially
expanded derivatives exposure. The July settlement logged decent volumes and
the carryover pattern was very strong with momentum maintained on August 01.
FIIs have increased overall exposure considerably in absolute terms to hold
around 43 per cent of all open interest (OI). Volatility
has stayed very high and has hit more than 60 implies that the markets are
treading in a dangerous zone. There has also been healthy OI expansion in
subsidiary indices such as the Bank Nifty and the CNXIT. The BankNifty
underperformed during the week, but ended on a strong note on Friday. The
CNXIT outperformed over the week. In
the index options market, apart from good carryover and high OI, the
put-call ratios (PCR) are in the neutral or bullish zone. In terms of OI,
the overall Nifty PCR is around 1.35 with the August PCR at 1.25. About 55
per cent of OI is in August and around 21 per cent is in December 2008 and
beyond. Government
Securities Market Primary
Market On
July 30, 2008, RBI auctioned 91-day and 364-day T-bills for the notified
amounts of Rs.3,000 crore and Rs 2,000 crore (out of which Rs 1,000 crore
under MSS) respectively. The cut-off yields for 91-day and 364-day T-bills
were 9.36 per cent and 9.56 per cent, respectively. RBI
conducted the auction of 10-year paper maturing in 2018, of three States for
an aggregate amount of Rs.2100.00 crores on July 31, 2008. The cut-off yield
for the security has been 9.86 per cent, 9.89 per cent and 9.90 per cent for
Kerala, Andhra Pradesh and Secondary
Market Inter
bank call rates ruled at 6.23-8.90 per cent during the week. Call rates
eased toward the weekend, indicating slight improvement in cash conditions.
The rates fell to 6-6.25 per cent, after hovering above 8.50 per cent,
initially. Banks covered their fortnightly positions ahead of the reporting
Friday, resulting into lower demand during the later part of the week. At
the LAF, RBI lent an average of Rs 15,020 crore through repos, lower than
the amount lent in the previous week. Few bids for reverse repos were also
received. In the monetory policy review RBI raised the LAF repo rate by 50
bps with effect from July 30 and CRR by 25 bps to 9 per cent, with effect
from August 30. Ten-year yield ended at 9.27 per cent from 9.15 per cent
after nearing 9.5 per cent briefly. Foreign
institutional investors (FIIs) have shown tremendous interest in investing
in domestic debt paper, including government securities (G-Secs) and
corporate debt. The enhanced debt investment limits that were notified and
auctioned by SEBI on June 16,2008, on a first-come-first-serve basis, has
created a wait list of FIIs. The limits were enhanced after a review of the
external commercial borrowing (ECB) policy by the ministry of finance. Bond
Market With
the role of rating agencies under the lens across the global, the domestic
financial sector regulators too have decided to review their functioning and
explore the possibility of strengthening regulation. Sources said the issue
has been discussed threadbare by the high-level coordination committee (HLCC)
on financial markets at the last two meetings and the SEBI has been asked to
come out with a paper on it. The moves follow a recent investigation by the
Securities & Exchange Commission (SEC) in the The
central bank’s facility, which supports the oil firms to buy crude oil and
keep their refineries running have appealed to the petroleum ministry to
ensure that the window is kept open. Also, the RBI Governor Y V Reddy on
Tuesday said the central bank might stop buying oil bonds directly from IOCL,
BPCL and HPCL. Over the last two months, RBI has bought oil bonds and given
the three companies over $4.5 billion (around Rs 18,400 crore), facilitating
them to buy crude oil. The
finance ministry wants the central bank to permit corporate houses to use
Foreign Currency Exchangeble Bonds (FCEBs) for import of capital goods. The
ministry said RBI’s proposal to limit the use of the instrument only for
financing overseas acquisitions by Indian companies is “too
restrictive.” Exchangeable bonds are instruments that allow a holding
company or the parent company of a group to raise funds from the overseas
markets for use by any of the group companies. The bonds will then be
converted into shares of the company for which funds were raised. During
the week under review, two non-banking financial companies and two
central undertakings have tapped the market by issuing bonds worth Rs
700 crore (Table 2).
American
Depository Receipts (ADRs) and Global Depository Receipts (GDRs) The
finance ministry has proposed a material change to its policy on pricing of
issue of shares in the case of global depository receipts and foreign
currency convertible bonds. In August 2005, the Government of India had
taken a protectionist measure. Amending the “Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism)
Scheme, 1993”, price restrictions were imposed on issue of global
depository receipts (“GDRs”) and foreign currency convertible bonds (“FCCBs”).
After this measure only initial public offerings, follow-on public offerings
and rights issues were spared of price regulation. The government had picked
up the minimum price formula contained in the SEBI (Disclosure and Investor
Protection) Guidelines, 2000 (“DIP Guidelines”). The
corporates have complained that under the existing pricing norms of ADRs and
GDRs, their offerings may not find many takers in the current bearish
market. As per the current regulations, companies have to price their issue
at the higher point of the preceding six months' average price or last 15
days' average price before the issue. Since prices have fallen rather
sharply over the past few months, in most cases the 6-month average would
become the benchmark. This price could be a lot higher than the current
price. The finance ministry has proposed to shorten the period of trading
used to compute the price at which equity shares could be issued in global
markets. The intention is to compress it to the higher point of the two
months’ average price (from the current six months) or 15 days average
price preceding the decision to issue shares overseas. There is another
simplification in the works. Under the existing norms, both the averages —
six months and 15 days — are calculated from one month prior to the date
on which the company’s shareholders decide to consider the issue. This
norm is designed to ensure that there is no price manipulation by the issuer
in the domestic market. The ministry also wants to remove this requirement
that the closing prices should be calculated one month before shareholders
decide to raise capital abroad. In future, closing prices up to the date on
which the shareholders decide on the issuance could be considered. This
would make the issue price more realistic, closer to the current price. The
government will wait a fortnight to receive public comments after which it
will notify the final changes. Foreign
Exchange Market The
rupee slipped during the week, to 42.36 per dollar from 42.26 per dollar
over the previous week. A positive reaction to the rate hikes was very brief
as the RBI governor followed it up by announcing that the dollar for oil
bonds scheme for oil companies would cease. The rupee slid in fear of an
increase in dollar demand from oil companies. Forward premia spiked after
the repo rate hike, but soon slipped again. Six-month premium ended at 4.6
per cent from 4.75 per cent. During
2007-08, the domestic foreign exchange reserves increased by $110.5 billion
to $309.7 billion from 2006-07. Commodities
Futures derivatives The
turnover of commodity markets rose in July compared to that in the year-ago
period following a shift of traders’ interest from agricultural products
to non-agri commodities. A bearish stock market and the government’s
decision not to impose a ban on more commodity futures also led to a surge
in volumes in the commodity markets. Commodity traders got a boost after the
UPA government won the vote of confidence. They have turned bullish with the
exit of the Left parties – the main political parties opposing the futures
trade — from the government. The
Parliamentary Standing Committee on Agriculture has recommeded against the
continuation of futures trading, especially in agricultural commodities,
citing speculative trading as the main cause for an artificial rise in
prices. Yet, the government has allowed its trading. Financial
Technologies-promoted National Spot Exchange (NSEL) is to be operationalised
by the end of next month will allow spot trading in a number of agriculture
and non-agricultural commodities. Initially, NSEL would facilitate
nationwide trade for goods delivery in Maharashtra, After
the bullishness seen in the first few trading sessions during the week, the
maize prices softened by end of the week on expectations that soymeal and
soyabean prices may slip. Because of the ban on maize exports, buying from
exporters has also vanished. Moreover, commodity experts believe that as
monsoon progresses, the kharif crop of maize would be larger than last
year’s production and thereby its prices will sharply react to these
developments. On the National Commodity and Derivatives Exchange, the
near-month contract of the commodity traded firm and touched a high of Rs
1,062 a quintal. On the spot market, the prices fell by Rs 10-30 a quintal
in the major markets. Crude
oil futures on the national bourse continued to remain weak last week after
witnessing more than a $22 fall in prices. On MCX, the crude oil August
contracts were declined further Rs 129 or 2.4 per cent to trade at Rs 5,227
per barrel on Friday over previous week. Total volume was 16.49 lakh barrels
while open interest was 10.98 lakh barrels. Gold futures prices were range
bound last week, as falling crude oil prices weighed on gold prices. Gold
prices fell below $900 an ounce for the first time after a month. The August
gold contracts were also down Rs 268 or 2.09 per cent to trade at Rs 12,499
per 10 gram over the previous week. Total volume was 2,417 kg. Open interest
was 2,660 kg. A
sustained fall in prices of four agriculture commodities-futures trade in
which were suspended in May-could lead to revoking of the suspension. The
government suspended futures trade in potato, refined soyoil, chickpea (chana),
and rubber on May 6, for four months, to control surging inflation. However,
data collected from various sources showed that barring potato, prices of
most other commodities have not shown a definite declining trend. Potat, the
only commodity, whose prices have declined after futures were suspended for
four months, has dropped by almost 19 per cent since May, while prices of
all the other three commodities have shown a rising trend. Rubber prices
have risen by around 14.23 per cent since May, while refined soyoil has
risen by around 19 per cent, chana went up by around 2 per cent since May. The
National Multi-Commodity Exchange (NMCE) has launched a new series for
futures contracts in non-ferrous metals, menthol crystal and raw jute. All
new contracts will be available for trading on NMCE platforms from August
01, 2008. The new contracts in the six non-ferrous metals - aluminium ingot,
nickel prime, copper, zinc, lead and tin - will mature on October 31,
menthol crystal on November 29 and raw jute on December 31, 2008. Corporate
Sector Private
carrier’s Jet Airways India Ltd has posted a net profit increase of 343
per cent at Rs 143 crore for the quarter ended June 30, 2008 as compared to
Rs 30.88 crore in the corresponding quarter during the last fiscal. Sales
stood at Rs 2,899 crore, up 46 per cent as compared to Rs 1,983 crore in the
last fiscal. Spice
Communications had announced a net loss of Rs 136 crore for the first
quarter of the current fiscal year 2008-09 as against a net profit of Rs
0.41 crore in the corresponding period in 2007-08.
BPO
firm HOV Services has announced a consolidated net profit of Rs 1.3 crore
for the first quarter ended June 30 for the current fiscal, down 67.9 per
cent as against Rs 4.14 crore in the corresponding period a year ago. NDTV
posted a profit after tax of Rs 2.08 crore for the quarter ending June 30,
2008 as against a loss of Rs 2.15 crore in the year-ago-period. Mahindra
& Mahindra (M&M) has announced the acquisition of the business
assets of the Pune-based Kinetic Motor Company Limited (KMCL) for a
consideration of Rs 110 crore. M&M will hold 80 per cent in the new
company while the remaining 20 per cent will be held by Kinetic Motor. The
deal will enable M&M to design and market a range of scooters, value
engineered motorcycles for Indian and global markets. External
Sector Exports
during June 2008 had been US $ 14664 million as against US $ 11870 million
in June 2007 registering a growth of 23.5 per cent. As against this Imports
was valued at US $ 24452 million as against US$ 19424 million recording a
growth of 2.9 per cent. In
rupee terms, while export increased by 29.7 per cent , import rose by 32.2
per cent. As a result trade deficit was estimated at US $ 9789 million in
June was higher than the deficit at US $ 7554 million during June 2007. Oil
imports were estimated during June 2008 at US$ 9033 million
and non-oil imports at US $ 15420 million was 53.4 per cent and 13.9
per cent higher than that in last year Telecom The
merger of the two-state owned telecom service providers, BSNL and MTNL, is
back on the government’s agenda. The plan is to first list BSNL, and then
merge the two companies. The government is in the process of finalising the
IPO of BSNL. It plans to divest 10 per cent stake by raising around Rs
40,000 crore. To win over the employees’ union, it is also looking at
providing them with ESOPS. With the objective of bringing about a higher
level of synergy between MTNL and BSNL and strengthening their competitive
position, the Department of Telecommunications (DoT) had appointed a
consortium of consultants led by ICICI Securities to assist in the
restructuring exercise more than two years ago. While suggesting several
options for the merger between the two, the consultants had identified the
acquisition of MTNL by BSNL, followed by BSNL’s IPO as the best option.
*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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