Current Economic Statistics and Review For the Week 
Ended December 12, 2008 (50^th Weekly Report of 2008)

 Theme of the week:

India ’s telecom sector has made rapid progress since the announcement of the National Telecom Policy – 1999 (NTP-1999). In addition, as a result of the various measures and initiatives taken by the government, India has now emerged as one of the leading telecom nations. Since 2000, the Indian telecom sector has been a key contributor to the economy’s impressive performance registering sustained high growth rates.  

The telecom sector has witnessed a complete transformation, particularly over the last 3–4 years. Currently, India continues to be one of the fastest growing telecommunication markets in the world. The mobile sector has grown from around 10 million subscribers in 2002 to around 326 million at the end of October 2008. Today, our teledensity stands at about 31.5 subscribers per 100 people. The fixed line numbers, in contrast, are falling, while mobile has emerged as the preferred access medium.  

The stupendous growth of telecom sector in India is attributed to the huge investments in telecom infrastructure, rapid expansion of the telecom network across the country and rolling out of services at a faster pace by the private and foreign telecom companies. As a result, today, the private telecom sector in India contributes a commendable share of over 85% of the total access lines.

Earlier Controversies  

As referred to above, progress of India ’s telecom industry has been extremely rapid. However, at the same time, the debates in policy issues, recommendations and suggestions have augmented significantly leading to complex controversies on a number of issues. It started with Department of Telecommunications (DoT) trying to subvert telecom liberalisation, followed by distressing problems about wireless in local loop technology and then there has been continuous tussle on spectrum allocation and issuance of new licences.  

The Recent Reported Scam  

In the recent reported scam involved in the issuance of new licences (2G) to mobile companies, the CPI(M) Party alleged that a scam running into crores of rupees was involved in it. The government's decision to allow new mobile phone service companies has created huge controversy with the Left alleging that it has led to a loss of Rs 60,000 crore to the government. This is perhaps, one of the biggest scam in the history of Independent India. It is believed that the process of issuance of fresh licences to new and existing operators was completed in flawed manner in which spectrum, used for mobile telecommunications, has been allotted without going through the process of auction has cause a loss of Rs 60,000 crore to the exchequer.  

The scam was exposed due to the two recent transactions, the first involving Swan Telecom and Emirates Telecommunications Corporation (Etilasat), and the other between a division of Unitech Ltd, United Wireless, and Telenor, confirm the view that the nation has lost no less than Rs 60,000 crore because of the methodology that was adopted by the (DoT) while allotting spectrum.  

New Licences and Spectrum Allocation   

In the process of allocation of licences (2G) to new telecom companies, the DoT in January 2008 resolved the issue by adhering to its first-come-first-served policy. DoT issued letters of intent (LoIs) to 9 applicants among 45 applicants, while rejecting the applications of 3 firms. The nine companies issued LoIs includes Unitech, Shyam Telelink, Datacon and Shippingstop Dotcom for pan India operations. Shyam Telelink, Spice Telecom, Idea Cellular, Swan and Tata Teleservices were also issued LOIs for a few circles. The applications of HFCL, Parsvanath Developers and Allianz Infratech were rejected. Those of ByCell and IndiaBulls were kept in abeyance pending necessary approvals. Only applications submitted up to September 25, 2007 were taken into consideration. With this, communications & IT Minister met the GSM operators’ demand that they be given priority in spectrum allocation over other claimants.  

Among existing GSM players, Aircel, Idea Cellular and Vodafone-Essar were allotted 4.4 Mhz for some circles to complete their national footprint, at the existing price based on Rs 1,651 crore for nationwide spectrum. Besides them, Anil Ambani-led Reliance Communications (RCom), which currently offers CDMA services, was allotted  the GSM spectrum under the government’s controversial decision of October 19, 2007 to allow companies to launch cellular operations in both technologies, as the GSM operators has challenged the dual technology decision at the telecom tribunal. However, DoT clarified that the government has enough spectrum to accommodate at least 5 to 6 new players after meeting the demands of existing GSM players as well as RCom, which has been permitted to start GSM services under the dual technology clause.  

In another significant development, DoT also cleared the Tatas application for GSM spectrum. Importantly, the applications of existing GSM operators such as Bharti for additional spectrum, which have been pending for close to two years, were cleared. Initially Idea, Vodafone and Aircel were given 4.4 Mhz of start-up GSM spectrum for launching services in each of the circles where they hold licenses.  

Valuation and Sale of Licences  

In January 2008, Swan Telecom, an unknown company, paid roughly Rs 1,651 crore ($330 millon) as mobile licence fees for 13 telecom circles. The company was not an established service provider with telecom network and customer base, nor did the company have any plan to make investment in the telecom infrastructure. Eight months after, that is, in September 2008, UAE-based Etisalat signed an agreement to acquire 45 per cent stake in India’s Swan Telecom for around $900 million (around Rs 4,140 crore) revealing enterprise valuation of Swan Telecom at $2 billion. Surprisingly, this handsome valuation comes despite the knowledge that spectrum is available in only a handful of the 22 circles for new entrants.

Similarly, Unitech sold 49 per cent of its stake to Talenor of Norway for Rs 6,120 crore, while having paid only Rs 1,651 crore as licence fee for the spectrum allocated to them.  

Consequently, the government has incurred a loss of Rs 10,000 crore on Swan Telecom and Unitech licences alone. The deal between telecom operator Etisalat and Swan Telecom, and Unitech and Talenor ( Norway ) had brought out the magnitude of largesse that had been doled out. In fact, the Government has actually got only one-sixth of what it should have got, had it gone through a fresh auction route. In facade, the value lies in the scarce 2Gspectrum that is bundled with the licence.  

Windfall Revenues  

These new telecom companies, which got pan-India licences for merely Rs 1,651 crore ($330 million), are now being valued at a staggering $3 billion, it raises concern over under pricing. While investment bankers agree that the high valuation represents the real market value of spectrum. However, a margin of 25% or even 50% while trading the spectrum is accepted, but in this case the valuation is above 400%.  

On the basis of valuation of the two deals signed by Swan and Unitech, the merchant bankers estimate that the six new telecom companies who were allotted Unified Access Service Licence (UASL) in January 2008 have a valuation of $15 billion (Rs 67,500 crore). While these companies have paid only around Rs 8,000 crore as licence fee to get 6.2 Mhz of spectrum even though they do not have a single subscriber. In short, these companies will make eight times the money they have invested in just eight months, if they were to sell off their companies today. Thus the above estimates prove that the handsome valuation of the new telecom companies comes only from the licence it has acquired from DoT. As a result, the government has lost money and private sector operators have made policy-induced windfall gains.  

Views on this Controversy  

The government's decision to allot licences to new telecom companies has created huge controversy with the Left alleging that it has led to a loss of Rs 60,000 crore. Expressing shock over the alleged scandal, the CPI(M) urged the government to either invoke fair trade practice sections. The CPI(M) has also suggested to levy a windfall tax on such speculative transactions.  

The government, however, has strongly defended its decision. The telecom ministry says it has always followed this model, but what has led to more questions is the low entry fee. Government has justified the low entry fee, saying that it will keep costs low and will mean lower call charges for consumers. Further, the telecom minister asserted that there was no deviation from the NTP-99 in allocating 2G spectrum or issuing licences to new mobile operators. Addressing a press conference, the telecom minister said, “The decision of issuing licences to new operators was based on the Cabinet approved NTP-99 and supported by the recommendations of the TRAI.  

On account of increasing allegations against the issuance of new licences the telecom minister consulted the Prime Minister and the Finance Minister. Surprisingly, the Finance Minister opined that none of the parent companies has sold out, they have only diluted their stake in order to get FDI.  

At the same time, DoT and The Telecom Regulatory Authority of India (TRAI) have also been engaged in a war of words of late on the issue of new 2G telecom licences on a first-come-first-serve basis. While TRAI maintains that its views were ignored by the government in issuing these licences, DoT says there is no violation of policy or of regulator’s recommendations on the matter. TRAI has clarified that the phrase in the TRAI Act, “need and timing for introduction of new service provider” was significant from the point of view of level of competition in the market and also availability of scarce resource spectrum.  

Government Measures

            The above mentioned two disinvestments also led to criticism of DoT and telecom Minister on the ground that the government had issued new licences at a price discovered in 2001 and which was a fraction of the valuation licences are currently fetching. The decision to consider a lock-in-period for the new entrants was taken after the recent meeting among telecom minister, PM and FM where the trio decided to drop an earlier proposal to impose windfall gain tax on the new entrants which have partnered with foreign operators.  

Conclusion  

Completely inexplicable principle of ‘first-come-first served’ based on a price discovered in 2001 was adopted while allocating new licences in the month of January 2008. These 2G licences were priced at 2001 levels purportedly to ensure these and the spectrum should not become expensive presuming that the benefit would be passed on to the consumers. In fact, the first-come-first-served policy did not even attempt any justification in a competitive telecom market. More importantly, even the TRAI has made it clear in its various reports that the price of a pan-India licence, which is at Rs 1,651 crore, should be pushed up as it was fixed in 2004.  

Telecom analysts argue that if competitive bidding can be used for oil and gas blocks, then why not for frequency spectrum. Analysts suggested that new bands of spectrum should be auctioned as there would be fair competition; operators who value it most will get it.  In fact, spectrum allocation through a transparent auction system will encourage more players to enter the telecom industry and would ensure sustainable competition.

Mahesh Uppal, Director Com First ( India ) says that, “arbitrary pricing and allocation have encouraged rampant speculation in a successful sector”. He further said that, “this is entirely a policy problem where the government has underpriced a manifestly valuable product which is spectrum. This is an expression of lack of transparent rule-making”.  

In fact, the ministry of telecommunications would have been in a position to avoid some of the disputes by taking firm and unbiased decisions on important policy matters. In the case of allotment of new licences, the ministry would have issued them in a cautiously planned and co-ordinated manner through a transparent auction system. So that equitable distribution of the existing resources would be made among all the players.  

References  

TRAI (2004): ‘Consultation Paper on Spectrum related issues: Efficient Utilisation, Spectrum Allocation, and Spectrum Pricing’, May 31.  

Sisodiya A S & Pothal S P (2008): ‘Spectrum Scuffle – War for the (Air) Waves’, The Analyst, February.  

Business Standard (2008): ‘It’s a windfall for new telecom operators’, September 26.  

Business Standard (2008): ‘What’s $10-15 bn between friends?’, September 29.  

The Financial Express (2008): ‘Two billion dollar question’, September 27.  

The Economic Times (2008):‘Taxpayers ripped off in the telecom regime? September 30  

The Times of India (2008): ‘Valuations soar for new telcos’, September 24.  

The Times of India (2008): ‘Swan Valuation creates jitters’, September 25.

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* This note is prepared by Bipin K Deokar. 

Imports of Edible oil is expected to dip by 5% during this oil year (November 2008-October 2009) due to volatile vegetable oil prices prompting most of the importers to cancel their high-price orders. In anticipation of a rise in import duty, shipments of palm and soyoil into India had risen between September and October this year. The total opening stock this year is estimated to be at 1.02 million tonnes compared with 750,000 tonnes last year, while the total edible oil production is projected to increase to 7.17 million tonnes as against 6.9 million tonnes last year. A rise in the per capita consumption of vegetable oil would see the overall offtake jumping by over 2% to 13.10 million tonnes this year, compared with 12.83 million tonnes in the previous year. With the government permitting export of bulk edible oil, the total shipments from the country is expected to increase to 200,000 tonnes from 175,000 tonnes, with the stock closing for the year at 900,000 tonnes as against 1.02 million tonnes last year. Industrial sources estimate that this year imports of edible oil would be around 6 million tonnes as against 6.3 million tonnes a year ago.  

Maharashtra State Cooperative Sugar Factories Federation Ltd. reiterated that sugar mills from Maharashtra would be planning to import at least 1 million tonnes of raw sugar, as the coverage under sugar cane has reduced drastically and output is expected to drop by 38% to 5.6 million tonnes. The sugarcane crop in India fell to 294.66 million tonnes in the year ending June 30, 13.5% less than that of last year, as farmers shifted acreages to more profitable crops. According to Czarnikow Group Ltd., imports of sugar by India, the world’s biggest consumer, would lead to global shortage of sugar, adding to past year’s 15% gain in raw sugar prices in New York. Global sugar supply would be around 5.8-million tonnes short of demand in the 2008-09 season, as tightening credit spurs mills to restrain output.  

Eight sugar factories in the state of Maharashtra , which started crushing in mid-November, have been closed down within just three weeks due to the non-availability of sugarcane. Less availability of sugarcane in the ongoing crushing season is poised to pull down sugar production in the state to around 50-56 lakh tonnes as against 91 lakh tonnes in 2007-08. So far 137 sugar factories have crushed 121.23 lakh tonnes of sugarcane to produce 12.10 lakh tonnes of sugar. In 2007-08 crushing season 128 mills had crushed 132.22 lakh tonnes of sugarcane to produce 14.05 lakh tonnes as on December 10 last year.  

Coffee prices, in the international market, are set to see a huge jump because of anticipated shortfall in the coffee production of Brazil in the next crop year. Coffee output in Brazil, the world's biggest coffee producing country, is expected to decline by 20-22% in the crop year 2009-10 as the country has a biennial pattern in coffee production.  

Exports of tea fell by 5% in October, as demand from overseas countries have hit badly due to global financial crisis, leading most of the buyers in several European countries to delay their shipments. Total exports of tea during October were 16.55 million kg, compared with 17.45 million kg a year ago, while output rose by 11% to 125.8 million kg. Exports from northern India drop by 15% to 9 million kg, but that from southern India witnessed a rise of 10%. Tea exports in 2008-09 is likely to cross 200 million kg, as country is looking forward to extent its export coverage to newer markets. Shipments are delayed to Russia , the UK and Germany due to low demand.  

Inflation

The annual rate of inflation, calculated on point to point basis, stood at 6.84% for the week ended 06/12/2008 (over 08/12/2007) as compared to 8.00% for the previous week ended 29/11/2008 and 3.84% during the corresponding week ended 08/12/2007 of the previous year. The rate of inflation, based on average monthly WPI, which was 10.97%  for the month of October 2008, has eased by 2.31 percentage points to 8.66% in November, 2008.  The index for the major group, Primary Articles, declined by 0.4% to 249.0  from 249.9   for the previous week. The index for Food Articles group declined by 0.5% to 243.4  from 244.7 for the previous week due to lower prices of moong (4%), urad (3%), fruits & vegetables and tea (2% each) and barley (1%). Due to higher prices of fodder (2%) and  groundnut seed, gingelly seed and raw cotton (1% each), the index for Non-Food Articles group rose by 0.1% to 234.6 from 234.4 for the previous week However, the prices of niger seed (18%), raw rubber (4%) and raw wool (1%) declined.  

The annual rate of inflation, calculated on point-to-point basis, for Primary Articles stood at 11.81%  for the week ended 06/12/2008 as compared to 11.66%  in the previous week.  It was 4.55% as on 08/12/2007 i.e. a year ago. For Food Articles, the annual rate of inflation stood at 10.19% for the week ended 06/12/2008 as compared to 10.52%  in the previous week.  It was 2.51% as on 08/12/2007 i.e. a year ago. The index for the major group, Fuel, Power, Light & Lubricants, declined by 3.7% to 332.1 from 345.0 for the previous week due to lower prices of naphtha (23%), furnace oil (15%), bitumen (11%), petrol (10%), aviation turbine fuel (7%), high speed diesel oil (6%), light diesel oil (5%) and lubricants (4%). The index for Manufactures Products declined by 0.3% to 202.4  from 203.1 for the previous week.

The index for Food Products group rose by 0.2% to 199.5  from 199.2  for the previous week due to higher prices of gur and bran (all kinds) (4% each), atta (2%) and cotton seed oil, groundnut oil and ghee (1% each). However, the prices of rice bran oil (4%), coconut oil (3%), imported edible oil (2%) and sooji (rawa) (1%) declined. Due to lower prices of texturised yarn (5%), the index for Textiles group declined by 0.1% to 141.5 from 141.7 for the previous week.

The index for Chemicals & Chemical Products group declined by 0.6% to 222.5 from 223.8  for the previous week due to lower prices of benzene (41%), purified terephthalic acid (pta) (24%), bopp film (11%) and liquid chlorine (1%). However, the prices of p.v.c. resins (3%) moved up. The index for Basic Metals Alloys & Metal Products group declined by 1.1% to 280.4  from 283.6  for the previous week due to lower prices of basic pig iron and foundary pig iron (7% each), joist & rolls and oromild steel & tensile plates (6% each), wire (all kinds) (5%), zinc (4%), skelps, cr coils and zinc ingots (3% each), cr sheets and angles, channels & sections (2% each) and steel sheets, plates & strips and other iron steel (1% each).  However, the prices of ms bars & rounds (3%) moved up. Due to lower prices of car chassis (assembled) (3%) the index for Transport Equipment & Parts group declined by 0.5% to 176.5  from 177.3  for the previous week.

For the week ended 11/10/2008, the final wholesale price index for All Commodities (Base:1993-94=100) stood at 239.3 as compared to 238.8 and annual rate of inflation based on final index, calculated on point to point basis, stood at  11.30% as compared to  11.07 %  reported earlier vide press note dated 24/10/2008.  

Infrastructure

The Index of Six core-infrastructure industries having a combined weight of 26.7% in the Index of Industrial Production (IIP) with base 1993-94 stood at 247.1 (provisional) in October 2008 and registered a growth of 3.4% compared to a growth of 4.6% in October 2007.  During April-October 2008-09, six core-infrastructure industries registered a growth of 3.9% as against 6.6% during the corresponding period of the previous year.

Crude Oil

Crude Oil production registered a negative growth of 0.3% in October 2008 compared to a growth rate of (-) 0.1% in October 2007. The Crude Oil production registered a growth of (-) 0.7% during April-October 2008-09 compared to 0.6% during the same period of 2007-08.

Petroleum Refinery Products

Petroleum refinery production registered a growth of 5.0% in October 2008 compared to growth of 2.7% in October 2007. The Petroleum refinery production registered a growth of 4.5% during April-October 2008-09 compared to 8.8% during the same period of 2007-08.

Coal

Coal production (weight of 3.2% in the IIP) registered a growth of 10.9% (provisional) in October 2008 compared to growth rate of 8.9% in October 2007. Coal production grew by 8.4% (provisional) during April-October 2008-09 compared to an increase of 3.7% during the same period of 2007-08. 

Electricity

Electricity generation registered a growth of 4.4% in October 2008 compared to a growth rate of 4.2% in October 2007. Electricity generation grew by 2.8% during April-October 2008-09 compared to 7.1% during the same period of 2007-08.

Cement

Cement production registered a growth of 6.2% in October 2008 compared to 7.5% in October 2007. Cement production grew by 6.0% during April-October 2008-09 compared to an increase of 8.5% during the same period of 2007-08.

Finished (Carbon) Steel

Finished (Carbon) Steel production registered a growth of (-) 0.5% in October 2008 compared to 5.2% in October 2007. Finished (Carbon) Steel production grew by 4.2% during April-October 2008-09 compared to an increase of 7.3% during the same period of 2007-08.

Industry

The General Index stands at 261.5, which is (-)0.4% lower as compared to the level in the month of October 2007. The cumulative growth for the period April-October 2008-09 stands at 4.1% over the corresponding period of the pervious year.

The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of October 2008 stand at 174.4, 276.9, and 231.2 respectively, with the corresponding growth rates of 2.8%, (-)1.2% and 4.4% as compared to October 2007. The cumulative growth during April-October, 2008-09 over the corresponding period of 2007-08 in the three sectors have been 3.7%, 4.2% and 2.8% respectively, which moved the overall growth in the General Index to 4.1%.

In terms of industries, as many as seven (7) out of the seventeen (17) industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of October 2008 as compared to the corresponding month of the previous year. The industry group ‘Other Manufacturing Industries’ have shown the highest growth of 11.0%, followed by 7.5% in ‘Beverages, Tobacco and Related Products’ and 5.4% in ‘Paper & Paper Products and Printing, Publishing & Allied Industries’.  On the other hand, the industry group ‘Leather and Leather & Fur Products’ have shown a negative growth of 18.1% followed by 14.4% in ‘Wood and Wood Products: Furniture and Fixtures‘ and 9.6% in ‘Cotton Textiles’.

As per Use-based classification, the Sectoral growth rates in October 2008 over October 2007 are 2.7% in Basic goods, 3.1% in Capital goods and (-)3.7% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of (-)3.0% and (-)2.0% respectively, with the overall growth in Consumer goods being (-)2.3%.

Alongwith the Quick Estimates of IIP for October 2008, the indices for September 2008 have undergone the first revision and those for July 2008 have undergone the second (final) revision in the light of the updated data received from the source agencies. (It may be noted that revised indices (first revision) in respect of August 2008 have already been released in November 2008 and these indices shall undergo final (second) revision in January 2009).

Statements giving Quick Estimates of the Index of Industrial Production at Sectoral, 2-digit level of National Industrial Classification (NIC)-1987 and by Use-based classification for the month of October 2008, along with the growth rates over the corresponding month of previous year, including the cumulative indices and growth rates, are enclosed.

Insurance  

The gross premium of the non-life insurers was Rs 2,457 against Rs 2,383 in April-October last year. Private sector companies recorded higher growth compare to the public insurers. But this increase in the premium is not soothing it shows reduction of the premium in October compared to September this year.  

Financial Markets  

Capital Markets

Primary Market  

As per media sources, investors have made money in one out of every five initial public offerings (IPOs) that hit the market in the past five years. An analysis of 257 IPOs, which were launched in the last five years, showed that in only 53 issues, investors are still in the profit. Of these, there are two stocks which have given over 1,000% return since their respective IPOs, after adjusting for bonus, split, demerger of businesses etc.  

Eighteen companies, collectively planning to raise Rs 9,000 crore through IPOs, will benefit from the Securities and Exchange Board of India's (SEBI) new norms to extend the IPO validity period from three months to a year. Seven companies, including two public sector undertakings and five private sector companies that got the SEBI approval between September and November will now get up to a year to float their issues. 

Gemini Engi-Fab Ltd has filed a draft red herring prospectus (DRHP) with SEBI for an IPO of 55 lakh equity shares of Rs 10 each, at a price to be decided through 100% book-building process. The issue comprises of a net issue to public of 27.5 lakh shares of Rs 10 each, out of which 5%, that is 1.37 lakh shares will be allocated to mutual funds and remaining will be allotted to qualified intuitional buyers (QIB).  

Secondary Market  

After the government unveiled a $4 billion package and RBI slashed interest rates by 100 basis points over the weekend, the stock markets were buoyant. Besides the stimulus package, the government lowered petrol prices by Rs 5 per litre and diesel by Rs 2 per litre - the first reduction since February 2007 - following over $100 a barrel slump in world oil prices from record highs touched in mid-July 2008. Inflation was down to 8% compared to 8.4%. Despite dismal index of industrial production (IIP) numbers and non-approval of the rescue plan for the US automakers, the markets closed in positive territory. By the end of the week, the BSE Sensex rose 724 points (8.1%) to close at 9,690. The BSE Mid-Cap gained 157.53 points or 5.45% to 3,050.48 and the BSE Small-Cap index rose 207.42 points or 6.24% to 3,530.96 in the week. Both these indices under performed the BSE Sensex. The S&P CNX Nifty rose 206.95 points or 7.62% to 2921.35 in the week.  

The SEBI has put in place a framework for a new hybrid product, whereby companies can raise low-cost debt and at the same time, allow investors to detach the equity component from the instrument and trade in it. SEBI has amended its Disclosure and Investor protection (DIP) guidelines to provide for a combined offering of Non-Convertible Debentures (NCDs) with warrants, through the Qualified Institutional Placement (QIP) mechanism. While NCDs and warrants would be offered together, they can be listed and traded separately. As per SEBI, QIBs can now subscribe to the combined offering of NCDs with warrants, or to the individual instruments. The minimum contract value for trading of NCDs/warrants has been set at Rs 1 lakh.  

Stock exchanges may reduce the annual listing fees for close-ended mutual fund schemes, which will have to get listed to comply with a recent SEBI directive. SEBI Chairman Bhave had said that all close-ended schemes (except equity-linked schemes) that are launched on or after December 12 must be listed on the exchanges. As per the SEBI circular, which issued on December 12, the listing fees for close-ended schemes should be "permissible" expense to be charged under regulation 52 (4).  

In a move that will bring relief to arbitrageurs and traders, NSE has slashed the margin for the revised stock lending and borrowing (SLB) scheme. The SEBI had issued a circular in October asking both BSE and NSE to put in place a revised framework for stock lending and borrowing. As per NSE circular, its clearing corporation will not levy the value at risk (VaR) and extreme loss margin (ELM) on the lender. Stock lenders would continue to pay the mark-to- market margin as well as 25% of the lending price. In case of early pay-in of securities, the lender will not be levied any margins. In the case of reverse leg transaction (borrower returns shares to lender), the lender would not be charged any margin at all. The NSE clearing corporation will continue to charge VaR, ELM, mark to market and fixed percentage of lending price as margin from the borrower.  

Domestic mutual funds, are set to witness a fresh round of redemption of Rs 36,848 crore between December 2008 and March 2009, with many of their debt schemes such as fixed maturity plans (FMPs), quarterly and monthly interval plans, fixed horizon plans and money market-related schemes set to mature during the coming months. According to the data gleaned from the Association of Mutual Funds in India (Amfi), about Rs 36,848 crore will flow out of 720 funds as the schemes will mature between December 2008 and March 2009. Of the 720 schemes, 102 will feel the pinch, with more than Rs 100 crore flowing out from them, aggregating a total redemption of Rs 25,600 crore. Another 501 schemes will see a total redemption of Rs 11,200 crore in the range of Rs 1 crore to Rs 100 crore each, while 81 schemes will see redemption of less than Rs 1 crore each.  

After banks, it’s the country’s largest insurer Life Insurance Corporation of India (LIC) that has come to the aid of cash-strapped mutual funds, which are reeling under redemption pressure on liquid and FMPs. The public-sector insurer has pumped in over Rs 14,000 crore into liquid funds of various fund houses. This is more than three times its investment of around Rs 4,500 crore in such instruments last year.  

Derivatives  

Nifty December future staged a sharp recovery of 7.8% over the week to end at 2921.7 points against its previous week’s close of 2711.1. It, however, ended almost at par with the Nifty spot, which ended the week at 2921.35. The series also saw a steady build-up in open interest positions.  

In the Nifty options market and indeed the stock options market as well, the put-call ratio has turned firmly bullish. Overall put call ratios (PCRs) are around 1 while the Nifty PCR in terms of OI is around 1.3. However, there has not been much carry-over yet with only 21% of option OI in January 2009 and beyond.  

The FII derivatives commitment is now down to around 31% against an average of 38% in 2007-08. The cumulative FII positions as percentage of the total gross market position on the derivative segment as on December 11 stood at 31.87%. Foreign institutional investors were predominantly net buyers last week. They now hold index futures worth Rs 8,842.16 crore (Rs 6,126.88 crore) and stock future worth Rs 10,649.29 crore (Rs 9,143.61 crore).Their index options holding stood higher at Rs 13,580.75 crore (Rs 11,070.33 crore). The VIX has remained stable at around the 51 level.  

Government Securities Market

Primary Market

The Reserve Bank of India (RBI) has set an underwriting commission of 0.0046 rupee for the 7.27% 2013 bond and 0.0109 rupee for the 7.50% 2034 bond, on December 11, 2008.  

On December 10, 2008, RBI auctioned 91-day and 182 day Treasury Bills (T-Bills) for the notified amounts of Rs 5,000 crore and Rs 500 crore, respectively. The cut off yield for 91 day and 182 day T-Bills has been set at 5.65% and 5.61%, respectively.  

The RBI re-purchased 7.55% and 5.87% paper maturing in 2010 for the notified amounts of Rs 5,000 crore each on December 12, 2008. The cut-off yield for both the securities has been set at 5.49% and 5.12%, respectively. On December 12, 2008, RBI re-issued 7.27% 2013 and 7.5% 2034, for the notified amounts of Rs 6,000 crore and Rs 4,000 crore, respectively. The cut-off yield for both the securities has been at 6.24% and 6.99%, respectively.  

Eight state governments auctioned 10-year paper maturing in 2018, for the notified amounts of Rs 5510 crore on 11 December, 2008. The cut-off yields for the 10-year papers range from 6.95-7.10%, being lowest for Tamil Nadu and highest for Andhra Pradesh.

Secondary Market  

Inter bank call rates moved in a range of 5.07-6.07% during the week. At the weekly LAF auctions, the recourse to the reverse repurchase window was Rs 24,035 crore. Bond yields continued to decline, fuelled by abating inflationary pressures and weak global oil prices. During the week, the benchmark 10-year government bond yield has fallen the most in seven years, sending bond prices to four-year highs. The yield on the benchmark 8.24% paper maturing in April 2018 ended the week largely unchanged at 6.20%, but the paper has rallied more than 55 points during the week.

Bond Market  

During the week under review, four FIs/Banks, one corporate and one central undertaking tapped the market through issuance of bonds to mobilize a total amounts of Rs 2650 crore.  

Corporation Bank plans to raise Rs 300 crore through an issue of upper tier II bonds. The bank will sell 15-year bonds paying an annual coupon of 10.10% for the first 10 years and a step-up coupon rate of 10.60 % for the last 5 years, if the call option is not exercised at the end of the tenth year.

Foreign Exchange Market  

The rupee closed at Rs. 48.71 per US dollar on 12 December, 2008 as compared with Rs.49.69 per US dollar as on December 05, 2008. The Rupee moved between Rs.48.52 and Rs.49.22. The six-month forward premia closed at 3.46% (annualized) on December 12, 2008 vis-à-vis 2.54% on December 05, 2008. Forward premia firmed slightly across all tenures. One, three, six and 12 month firmed to 5.3% (4.95%), 4.61% (3.58%), 3.26% (2.48%) and 2.3% (1.75%) respectively. The short-end forward premia also widened as foreign banks stacked up government securities to book treasury gains. Three-day forward premia firmed to 5.3%.  

The country’s foreign exchange reserves fell by $1.83 billion to $246 billion for the week ended December 5, due to revaluation of global currencies and also due to selling of dollars by the RBI. In the previous week ended November 28, foreign exchange reserves had increased by $1.88 billion to $247.68 billion. As per RBI, the foreign currency assets declined by $1.82 billion to $237.15 billion, for the week under consideration.  

Currency Derivatives  

On December 08, Financial Technologies India (FTIL) alleged that NSE, which has kept it on the ‘watch-list’, was also attempting to remove the firm from its panel of software vendors. The row between the two entities began when FTIL sought permission for currency derivatives Application Protocol Interface (API) access to integrate with the current CTCL solution the NSE members were using. The integration with CTCL is believed to help brokers to access all markets — equity, F&O, commodity and currency derivatives — on a single screen. FTIL has been empanelled with the NSE since 1998 as a CTCL solutions provider for equity as well as futures and options (F&O). The other empanelled members are NSE.IT (owned by NSE) and Omnesys. Financial Technologies, which is also the main promoter of commodity bourses MCX and stock exchange MCX-SX, demanded clarification from the NSE for keeping it on the ‘watch-list’, in the public notice. The reason for keeping the firm under watch has not been communicated to FTIL and the company has not been given an opportunity to represent its case.  

Three months after the launch of the currency futures segment on the NSE, the nascent sector is witnessing significant growth in volumes and number of participants. From a modest 65,978 contracts valued at Rs 291 crore as on August 29, the day on which currency futures was launched, it had grown to an all-time-high of 2,71,392 contracts valued at Rs 1,372 crore on 20 November, 2008.  

The intense competition between MCX-SX, the exchange floated by Financial Technologies, and the NSE is bringing in efficiencies and currency future exchange clients are benefiting. While NSE leads the volume on some days, MCX-SX leads on other days. On the MCX-SX, mark to market is being levied on T+0 basis. VAR (value at risk) margins levied due to volatility are also lower compared to the margins levied as per T+1 basis. Currency exchange traders are breathing easy due to the lower upfront margin. MCX-SX has adopted this model since it launched currency futures on October 7. This prompted NSE to follow suit. The exchange implemented the system of levying VAR margins from December. The margin incidence was lower by nearly one percentage point or 20-25% of total margin. This system has approval from the regulator. In the T+0 system, the process of pay-in of funds relating to the end of the day mark-to-market outstanding positions is completed before the commencement of the next trading day. This enables exchanges to have a better hold on any possible defaults, thus enhancing greater efficiency in risk management. Also, while MCX-SX continues trading during sun-outage, NSE keeps its operations shut as satellite-based V-sats don’t work properly at that time. But MCX has been advising its members to use back-up leased line facilities whenever there is a sun outage problem. When SEBI inquired with MCX, it was clarified that members can work on back-up leased lines and there is no need to discontinue trading despite sun outage.  

Commodities Futures Derivatives  

According to the Forward Markets Commission (FMC) chairman BC Khatua, the commodity markets, which witnessed dramatic changes in 2008 following volatility in global markets and the economic recession, are expected to see a better year for agricultural items in 2009. Prices and volumes in metals, bullion and energy commodities rose following volatility in the global market, while in agriculture items, volumes declined 30% because of a ban on four items — chana, potato, soy oil and rubber — which has been lapsed on November 30 after nearly seven months. The FMC expects the ban on futures trading in wheat, rice, urad and tur, which have been imposed in 2007 to control prices, to be lifted in ‘a few weeks’ time. The chairman said that, the ban could be lifted by the end of December or by January. The FMC has sent a detailed report to the government, favoring the lifting of the ban, and also held discussions with the ministry concerned.  

Banking  

Mumbai-based Kapol-co-operative Bank is acquiring two Gujarat-based co-operative banks by the end of current financial year. After getting clearance from the Registrar of Co-operative Societies of the state, Kapol Bank will apply to the Reserve Bank of India go get approval. The bank has 15 branches out of which 14 are in Mumbai and one branch is in Surat . Post-acquisition, Kapol Bank will add another six branches.  

In terms of the extant Anti-Money Laundering guidelines, Full-Fledged Money Changers (FFMCs) are permitted to encash foreign currency and make cash payment only upto US$ 3000 or its equivalent. Amount exceeding US$ 3000 has to be paid by way of demand draft or bankers’ cheque.  

Corporate  

To strengthen the presence in India ’s financial services sector, the Hinduja group has acquired 40 per cent stake in Paterson Investment and Consultancy Services (Patco), a Chennai-based stock broking company, for an undisclosed amount. Patco a founder member of the Madras Stock Exchange is 150 years-old brokerage firm, which is the largest stock broking firm in South India . Patco’s market share has declined significantly after the electronic trading system was introduced in the country.  

ONGC Videsh Ltd (OVL), the overseas investment arm of India ’s largest oil producer Oil and Natural Gas Corporation (ONGC) is buying the UK-based listed Imperial Energy Plc.  To buy out this company OVL will take help of domestic banks and its parent company. This acquisition will cost OLV $2.1 billion from which ONGC will be financing $1.1 million and around $1 million loan will be disbursed by banks for which ONGC will be guarantor.  

Mahindra & Mahindra (M & M), which has announced that it would moderate the production of its farm equipment division. This decision came in the context of suppressed demand for tractors and existing inventory. In November total sales of tractors, including domestic and exports of the company dropped by 32% to 5,487 units compared to 8062 in the same period last year.  

The Indian auto industry, which has been witnessing reduced demand due to high interest rates and liquidity crunch in the market, has a slight of relief after the government announced measures to boost demand. Recently, the government has slashed the Central Value Added Tax (Cenvat). Accordingly, a number of automobile companies have decided to pass on the benefit to the customers. Maruti was the first automaker to announce 4 per cent reduction in the prices of vehicles. Toyota Kirloskar, Hindustan Motors and Hyundai have followed Maruti and have announced reduction in prices. Tata Motors are also on the verge of reduction in prices.  

Reliance Industries’ ambitious plan to enter the pharmaceuticals business has suffered a setback with company planning to start 25 new shops from its earlier plan of opening 75 shops on account of business rationalisation by the parent company.  

Many industrialists are reviewing about their upcoming projects due to slowdown in the economy. Shyam SEL & Power Ltd may be the first one to start operations of the proposed steel projects in West Bengal .  This project will be operational by the end of 2009 costing Rs 2,000 crore. The capacity of this project is 0.25 million tonne. Other investors in the steel sector in the West Bengal are JSW Bengal, Jai Balaji Group, Videocon Industries Ltd, etc.  

Leitner Shriram, which is a joint venture company, is manufacturing 1.5 mw capacity wind turbine generators (WTG) near Chennai. The company is planning to target the fast growing domestic and European markets. The company will is planning to manufacture 120 turbines a year and will increase the number to 250 wind turbines from 2010.   

Japanese firm Mitsui & Company is setting up an integrated logistics park in Haryana, with a total investment of around Rs 5,000 crore.   

As auto firms slashed prices of their cars after the reduction in central value added tax (Cenvat), following the same pattern tyre makers like JK and Apollo have cut down prices of their products to pass on the benefit of 4 per cent cut in excise duty to its customers.  

Japan ’s Nissan Motor Company and its domestic partner Ashok Leyland Ltd have decided to delay production of light commercial truck by six months to September 2011.  Earlier planning was to start production from April 2010 near Chennai with the initial capacity of 100,000 units a year.  But the slowdown in the economy is the reason to take the decision of postponing production of the light commercial truck.  

Information Technology  

Nasscom has strongly refuted reports suggesting that the business process outsourcing (BPO) firms are likely to see 2.5 lakh job losses by the first quarter of 2009 in the wake of global downturn. The BPO industry currently employs more than 7 lakh people.  

Telecom  

In the month of January, Mahanagar Telephone Nigam (MTNL) is launching 3G services in India named as ‘Jadoo’. 3G services provide high-speed download of data and the images on mobile phones. With the launch of 3G services India joins the league of countries like the US and the Europe .  

The Confederation of Indian Industry (CII) has suggested that department of telecommunications (DoT) should allow the issuance of mobile user cards from post offices. The step will be aimed to prevent misuse of mobile phones by terrorists.

LIST OF WEEKLY THEMES

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