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The Senior
Analyst
February, 2013 Issue
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Contents
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The Team - Finsoc, FMS Delhi
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Finance Lab at Faculty of Management Studies
Late in 2012, FMS Delhi became only the third campus in India to be equipped with
a Bloomberg terminal. With this terminal,
students will now have access to live data
across great breadth and depth. The
terminal will provide information on
government securities, equity markets,
debt markets, rates, capital structures,
industry comparables, and a host of other
categories.
This terminal will enable students to
greatly improve the standard and level of
detail in their final year dissertations, as
well is in their term assignments, case
studies, and collaborative research that
many students opt to do with faculty
members.
In addition, the terminal will play an
important role in making students
industry ready. Most finance professional
use Bloomberg terminals regularly, and
being familiar with the scope and
operation of a finance industry staple will
be an added boost to a prospective recruit
candidature. Companies can rest assured
that fresh recruits fully appreciate the
potential and importance of the terminal.
Finally, the terminal will also help students
in endeavors outside of pure academics
and professional skill building.
Competitions are a staple of b-school life,
and access to the terminal will help
students perform analysis and dissect
problem statements with greater insight,
hard data, and contextual understanding.
Therefore, the terminal will significantly
enhance a students learning during their
MBA program, and also better prepare
them to join the corporate world. This
initiative demonstrates FMS commitment
to developing financial education, and
validates the institutes reputation as a hub
for learning.
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The IPO safety net: Investor Protection or Wrongful Intervention?
SEBI chairman Mr. UK Sinha recently
created headlines in the financial press when
he said that the capital market regulator is
going to implement a safety net mechanism
to protect retail investors from incurring
significant losses in case of failed IPOs. This
move by SEBI has been triggered by
widespread dissatisfaction over IPO pricing
among small investors in recent months.
Theres an impression that small investors are
being willfully fleeced by managements and
merchant banks who have superior
information. Echoing this concern, the
Chairman said at an Assocham event, The
pricing of IPO in this country has been an
issue. Again and again, we are finding that
there is lack of transparency in pricing. In
this situation, SEBI feels it must take some
action in order to restore investor trust in the
financial markets. Earlier it had issued a
discussion paper titled Mandatory Safety
Net Mechanism and invited comments from
the public.
The response from the bankers and the
financial industry has been predictable. They
have termed the proposals a draconian
intervention in a free market. Some fear that
such regulations would not deter crooked
promoters and their shady financiers, but
would keep honest companies out of an
already slow IPO market. Others feel that the
proposed regulations are a throwback to the
pre-liberalization days when the Controller of
Capital Issues (CCI) stipulated the prices of
all capital issues using a predetermined
pricing formula. It has been argued that
financial markets operate on the principle of
risk and return and equity capital, by its very
nature, implies ownership and hence risks.
Before going into the details of the proposed
regulations and their pros and cons, we feel
its important to take a look at some of the
statistics of the IPO market scenario in India.
The IPO situation
The table below shows that there has been
significant slowdown in fundraising via the
IPO route in the past couple of years. This
slowdown has been attributed to a
combination of factors including global
economic slowdown, subdued secondary
markets at home, policy logjam at the Centre
as well as poor investor response. In 2012, at
least a dozen companies shelved their IPO
plans even after obtaining all the required
clearances from SEBI.
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Table 1: Marked Slowdown in IPOs
Financial Year Number of Issues
Succeeded
No of issues
failed
Total Amount Raised
(Rs crore)
2012 25 2 6895.94
2011 37 3 6043.57
2010 64 2 36,362.18
2009 21 1 19,306.58
2008 36 3 18,339.92
According to the discussion paper floated by
SEBI, an analysis of the price performance of
scrips listed between 2008 and 2011 shows
that out of a total of 117 scrips, 72 (around
62% of the issues) were trading below the
issue price 6 months after the listing. Out of
these 72 scrips which witnessed a fall in
price, in 55 scrips the fall was more than 20%
of the issue price. Our analysis shows that
this trend continued in the year 2012 as well.
Though some of the scrips increased in
absolute value, they underperformed the
market. In this context, it must be kept in
mind that the BSE Sensex posted gains of
25.7% in 2012 and was one of the best
performing stock indices in the world. The
following table shows the largest IPOs of
2012 and the performance of the scrip 3
months after listing. The table also shows the
performance of the BSE Sensex in the
corresponding period.
Table 2: Dismal performance of IPOs in 2012
Issuer
Company
Issue
Clos
e
Issue
Size (Rs
cr)
Issue
Price
(Rs)
Price after 3
months/Year
end(Rs)
%
change
in price
% change
in Sensex
Bharti Infratel
Limited IPO
Dec 14 4,155.80 220.00 192.85 (31st Dec) -12.34 0.56
PC Jeweller
Ltd
Dec 12 609.30 135.00 149.7 (31st Dec) 10.88 0.36
CARE Ltd Dec 11 539.98 750.00 914.55 (31st Dec) 21.94 0.20
MCX India Feb 24 663.31 1,032.00 888.05 (24th May) -13.94 -9.49
Tribhovandas
Bhimji Zaveri
Apr 26 200.00 120.00 103.55 (26th July) -13.70 -2.86
The table shows that 3 out of the 5 biggest
issues in 2012 traded below their issue price
three months after listing /at end of year.
Among these, the biggest issue by far, Bharti
Infratel was a spectacular failure. The stock
was trading 12.34% below its issue price a
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fortnight after its listing, even as the market
index posted nominal gains.
The SEBI Proposal
In the discussion paper, SEBI proposes a broad
framework for the safety net mechanism for
investors. Some of the salient features of the
framework include:
a) The Safety Net shall be mandatory for all
IPOs
b) The Safety Net provision shall trigger only
in cases where the price of the shares
depreciate by more than 20% from the issue
price. The price will be calculated as the
volume weighed market price the shares for
a period of 3 months from the date of listing.
The 20% depreciation in the market will be
considered over and above the general fall
(if any) of the market index. The market
index used for this purpose will be the BSE-
500 or S&P CNX 500.
For example if the share price (calculated by
the prescribed method) drops by 25% in 3
months while the market index drops by 3%,
the safety net will be triggered. But if the
market index drops by 7%, the net wont be
triggered. On the other hand, if the market
gains 10% and the stock depreciates by 11%,
the safety net wont be triggered, even
though the relative fall is more than 20%.
This is because the absolute drop in the
stock price is 11% which is lesser than the
trigger level of 20%.
The paper also mentions the eligibility
criteria for investors under this mechanism.
The two most important points among the
criteria are:
a) The facility will be available for all the
allotted securities to original retail
allottees who had made an application
for up to Rs 50,000
b) The total liability of the Safety Net
Provider will be capped at 5% of the
issue size.
c) In case the total number of shares offered
under this scheme works out to be more
than 5% of issue size, the purchase of
securities from retail investors shall be
done on proportionate basis such that
total obligation does not exceed 5% of
the issue size.
Evaluation of the Proposal Some of the proposals forwarded by SEBI
have attracted criticism from various quarters.
In this section, we evaluate the proposals and
discuss possible pitfalls.
a) Calculation of Safety Net trigger: The
discussion paper calculates the safety net
trigger relative to the overall market
index. This method makes the implicit
assumption that the given security is as
risky as the overall market.
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The fundamental premise of the proposals is
that the sole risk facing an IPO investor is
mispricing of a security and overall market
movement (systemic risk) and hence the
regulator is entitled to take action to reduce
the mispricing risk which primarily arises out
of an information asymmetry between the
issuer and the small investor. This approach
ignores all other risks, including industry
specific risks and firm specific risks. In
capital markets, stock prices may crash due to
resignation or death of key management
personnel, accidents, policy change leading to
re-rating of a particular sector etc. The
proposed framework fails to take these risks
into consideration.
b) Eligibility Criteria for retail investors:
The paper proposes that the safety net
facility should be made available to retail
investors who made an application for up
to Rs 50,000. But in Oct 2010, SEBI
increased the investment limit for retail
investors from Rs1 lakh to Rs2 lakh,
taking inflation and other factors into
consideration. Also data shows that going
by the subscription figures for IPOs since
November 2010, barely 15-30% of retail
investors bid for less than Rs50000 of
shares. For example, in the MCX India
IPO, which was one of the biggest issues
of 2012, the number of applications that
came from investors bidding for less than
Rs50000 of shares stood at just 28.9%.i
This artificial cutoff would incentivize
retail investors to invest in multiple issues
than into a single public issue, regardless
of the quality of the other issues.
c) Safety net period: The SEBI proposal that
the safety net should trigger three months
post the listing date is also fraught with
problems and seems inadequate for
protection of retail investors. If the
promoter does have malafide intent of
mispricing a security, he can easily rig the
prices and artificially support the security
at issue price levels for three months.
d) Promoter liability: The current proposal
primarily holds the promoter responsible
for providing the safety net irrespective of
whether the promoter has actually
benefitted from the issue (by an offer for
sale of his shares or by taking cash out of
the company). This creates an extra risk
for the promoters and leaves the
possibility of an honest mistake out of the
consideration set. This might have the
undesirable effect of making the IPO
route a risky way of raising money.
Conclusion There is little doubt about the fact that the
pricing of IPOs is a problem in India at
present. And the market regulator is
rightly concerned about the weakest and
probably the least informed player in the
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field; the retail investor. But it appears
that the safety net mechanism in its
current form is probably not the right way
forward. The market regulator must take a
long and hard look at the current
proposals and overhaul the mechanism.
Alternatively, it should focus more on
market integrity by ensuring proper
checks and balances on issuers and
intermediaries. It should also facilitate
seamless information flow to market
participants by upholding strict disclosure
standards and at the same time strengthen
its investor education programs.
Article by -
SanchalakBasu
XLRI, Jamshedpur
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The Return of the Reform Impact of 1991?
On 15th
August, 1947 Jawaharlal Nehru,
Indias first Prime Minister spoke out to the
people of the nation, At the stroke of the
midnight hour, when the world sleeps, India
will awake to life and freedom. India, then
began its long and laborious path to
rebuilding itself. And from 1947-91 it had
restricted trade and foreign investment into
the country, till the point the strain on the
economy could not bare the isolation from
rest of the world any longer. Even with a
great opposition, India underwent an
extensive reform in 1991 which enabled it to
move towards its potential as major player in
the global market and now 20 years later the
country is taking another leap forward
towards liberalization, unfortunately it has not
been able to amount to the same level.
In 1991, The Indian economy had reached the
tipping point where in its foreign reserves
could fund the countries imports for only a
mere 7 more weeks. A change was not only
advised, but was required for the survival of
this young nation. Manmohan Singh, at the
time Indias Finance Minister pushed for
legislation to open the Indian economy to the
world. At the time there was even external
pressure from both the World Bank and the
IMF to do so, urging the country to remove
its trade barriers. The combination of these
circumstances, forced the Indian Government
to call for a change, the industrial areas
restricted to private enterprises was reduced
from 18 to 3, i.e. Nuclear, Armed forces and
railways. Additionally, the Governments
Industrial controls and licensing was
dismantled to ensure competitiveness and an
increase in efficiency in addition to the
movement of the Indian currency from fixed
to a floating exchange system.
At the time the general public were opposed
to these policies out of fear that free trade
would result in a loss of their jobs but it was
assured that it would be beneficial to the
country and its people in the long run. India
then witnessed one of the greatest
transformations in economic reform and
development, with the 2nd
highest GDP
growth rate in the world and with a FDI that
grew at a CAGR of 36.3%* from 1991-2010.
But in the last few years, the impact of those
reforms has began to diminish, India now
faces a global economy which requires
similar reforms to keep it a attractive market
for investors.
In September of 2012, Manmohan Singh,
now the Prime Minister of India continued to
push for economic reforms, to keep India a
haven for investors from across the world
with reforms such as to reduce the diesel
subsidies by 12% and leave investment by
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foreign supermarkets in the hands of the state
government as opposed to the central.
Additionally, the restriction of single foreign
investors such as IKEA would be lifted to
give freedom to the companies to invest in
India without the requirement of a domestic
partnership. Similar steps were taken for the
power sector, domestic broadcasting and
aviation sector.
We can undoubtedly claim these steps are
moving India towards once again achieving
its pace of development, However the level of
these reform cannot be stated as the same
level as those that took place in 1991. Thus,
would not be able to leave as great of an
impact. The reforms that took place in 1991
involved external pressure from the World
Bank allowing for an industry wide
liberalization at a time when India was being
eyed by corporations for its excess supply of
cheap labor. These reforms resulted in years
of rapid development and increase in
employment across all sectors. Unfortunately,
the reforms being suggested now are mostly
restricted to specific sectors and requiring
heavy investment and risk on the part of the
company without much guarantee to whether
this expansion would be successful or not.
Thus restricting investment to only the major
conglomerates.
This situation has led to foreign investors
setting their eyes on other markets. Where
India had a CAGR in FDI of 37.7% from
1992-2000*, it has now dramatically reduced
down to 7.2% from 2006-10. Other countries
have proven to appear more attractive with
Vietnam having CAGR in FDI from 2006-10
of 35.1%, Indonesia with 29.3% and Brazil
with 28.8%. Thus, corporations have begun
outsourcing jobs requiring unskilled labor to
other parts of the world. As Indias per capita
has increased since 1991, foreign
conglomerates have started searching for
investment in other countries where they can
continue to pay low wages for decent quality
products.
As Indias per capita has increased since
1991, foreign conglomerates have started
searching for investment in other countries
where they can continue to pay low wages for
decent quality products.
Through the reforms in 1991, the inflation
rate in India was kept in check through
competitive prices and more efficient
operations. Unfortunately now this inflation
has returned to a projected 7%. We now
require further liberalization on the same
scale to keep the prices in check.
Unfortunately, the publics perception that
foreign investment in retail would result in a
loss of their jobs along with red tape and
bureaucracy is currently hampering any truly
developmental reforms from taking place.
The impact within each of the relevant sectors
will definitely witness a benefit in long run.
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With the ease of restrictions in the retail
sector, retail giants such as Wal-Mart can
now enter the market with a number of states
signed on to facilitate their endeavor. Indias
inflation in 2010 had reached a staggering
8.4%, the introduction of foreign retailers
would help to manage the prices. A more
efficient supply chain, which would be
brought by these corporations would allow
for a decrease in price by about 20% and
increase in income realizations for farmers by
15% according to CRISIL. The FDI policy
requires $100 million investment over the 3
years of which 50% is suppose to be in back
end operations. This policy would thus allow
for a combination of creation of jobs while
keeping prices in check.
Unfortunately, this may not be entirely
positive in the short run. The overall retail
market in India is estimated to $450 million
of which 93% follow traditional methods of
retail. The introduction of modern retail with
lower prices while offering higher income
would shift attention away from these
traditional stores and would likely lead to
unemployment. However as with any
liberalization process, a loss of jobs in
inevitable to allow for a country to specialize
and concentrate its efforts on its competitive
advantage.
With the 12% decrease in diesel subsidies,
which has become the primary source of fuel
in the rural areas by farmers for tractors, there
has naturally been a certain level of
dissatisfaction from the people, however it
shows a movement towards a more
competitive environment. It would allow for
the government to utilize this surplus of funds
for programs in the areas of health and
education, which could benefit the country in
long run.
India certainly has the ability and the
resources to once again achieve the pace of
economic development it once had,
unfortunately, poor implementation of
policies and slow bureaucratic process to
achieve these reforms has hindered its
development.
Article by -
Samir Evan Jain
FMS, Delhi
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Quantitative Easing A Blessing or a Curse?
An Insight
During the times of turbulent economy,
various countries of world try to apply
their conventional tools, monetary and
non-monetary, to regain a state of sound
economy. Majority of world economies
tried to reduce their short term interest
rates of market lending from commercial
banks to bolster the borrowing and
spending from households and businesses.
But then a point arrives when economy
faces a phenomenon which is widely
known as Liquidity trap (short term
nominal interest rate is zero). There exists
no possibility for the Central Bank of a
country to further reduce short term
nominal interest rates from that point
onward. Such constrained scenario pushes
the Central Bank of the country to employ
various unconventional monetary policies
to alleviate the deflationary economy.
One such unconventional monetary tool
used by the Central Banks (especially
when interest rates are close to zero) to
stimulate the economy is known as
Quantitative Easing (or more popularly
QE) in economists fraternity. The Central
Bank implements QE by first creating new
money and then using this new money to
purchase assets from a range available -
Government bonds, equities, corporate
bonds or other assets from banks.
With this process the central bank ensures
that it injects a pre-determined quantity of
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money in the economy. This results in rise in
assets price and fall in the yield, or interest
rates on those assets making the borrowing
and spending more attractive and hence
resulting in improved economy. It also aims
at increasing the excessive reserves of the
banks for higher lending and consequent
spending by the households and businesses.
Low and stable inflation is crucial to a
thriving and prosperous economy. QE can
also be used by the Central Bank to ensure
that inflation does not fall below or rise above
optimum target (Generally it is considered to
be 2%).
Pros and Cons of QE
QE is often referred to as a last resort of the
Central Bank to restore the disrupted
economy. But before answering the question
in subject, whether QE is a blessing or a
curse, an insightful evaluation of topic at
hand is of prime significance and to best
achieve the purpose, the author have enlisted
various merits and demerits of QE.
Purchasing of Assets and its
distributional effects
Purchasing of Assets, as quoted above, have
been mostly advantageous to banks and other
financial institutions. It has helped banks to
increase their excess reserves and the size of
their balance sheets. Also buying of too much
of above quoted assets increases their price
which unblocks credit market as investors
now start investing in appreciating assets,
who were otherwise shedding away. But the
prime concern that underlines this activity is
that in the past there have been instances
when banks did not encourage the lending to
households and businesses and hence retained
the surplus with them. Also, this current
process of stimulating economy focuses well
on financial market of economy but fails to
transform the other craving for cash sectors
like infrastructure, energy etc. during
economy downturn. Hence relying on banks
may not serve the purpose of stimulating
economy if banks fail to act as an active
agent.
Inflation Is Central Banks approach
myopic?
At prima facie, QE offers a short to medium
control over inflation rates, but a holistic
perspective would starkly reveal the truth
behind the curtain. First, the Central Bank
relies on banks and other financial institutions
to lend money to businesses and households
and stir the economy and rise in inflation.
This calls for responsible approach from
banks, which is not guaranteed though. Also,
unless the Central Bank devise a diversified
assets purchase drives, long term assets
bought by the Central Bank from banks may
not be equally competitive and profitable at
the point of maturity and hence dispensing
them then becomes a challenge for the
Central bank which would leave the latter to
incur loss. This loss consequently would be
transfer to Tax-payers. Hence in the long run,
economy could suffer from hyper (or
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massive) inflation if the amount of easing is
over estimated.
Threats to conventional investment
policies
QE tends to push down long-term bond
yields, making other short term investment
plans more attractive for immediate spending
and investment. But in this process, QE
reduces the return on the long term
investment made by pension schemes. As a
result, QE makes it more expensive for
employers to provide pensions and
consequently it weakens the funding of
schemes as their deficit increases.
Does QE lead to global economy
fracture?
An unpredictable outcome of Feds QE3
declaration was a worldwide opposition. US
banks utilised the Fed reserves and treasury
bailouts received from QE2 to increase their
own profits and to continue paying high
salaries and bonuses. What their lending
inflated, were the asset prices and not the
commodity prices, neither output nor
employment rates. Cheap electronic US
keyboard credit, then started flying abroad
as banks tried to earn their way out of debt by
financing arbitrage gambles, glutting
currency markets while depreciating US
dollars. So the Feds move of saving banks
from negative equity resulted in flooding the
global economy with a glut of US Dollar
credit, destabilizing global financial system.
Unwinding Policy Exit strategy from QE
Economists generally quote QE as a process
and not an event. There always exists an
underlying pressure on the Central Bank to
exit from QE by selling back the riskier assets
and narrowing down its balance sheet. But
this process is not that simple as it appears.
There are all the chances that the Central
Bank may end up pilling bonds worth trillions
of rupees and find it difficult to unload them
off because selling such astronomical figures
of bonds back to financial institutions will
only hamper its very own objective of
restoring sound economy.
Post to evaluation of various nuances
involved in implementation of QE and
considering pros and cons, the author believes
QE could prove to be a curse for an economy
if not implemented aggressively and tactfully.
The major QE failures which world witnessed
were the series of QE drives undertaken by
Bank of Japan (BoJ) from 1996 to 2006. The
prime reason of failure then was that the local
banks held the reserve surplus generated by
BoJ with themselves rather than offering it to
households and businesses for lending and
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consequently for spending and increasing the
employment rate. Also USAs Federal
Reserves and UKs Bank of England are not
much confident about the success of their QE
program which they undertook post to late
2007 Global crisis.
A significant threat that underscores QE is a
stock bubble. When Fed reserve recently
announced its 3rd
round of QE, almost all
major stocks started exhibiting the upward
trend.
One of the prime financial websites explains
it as, What is happening now is that stocks
are appreciating, not because of enhanced
productivity or expanding markets, but simply
because Central Banks are printing money.
There could be a critical moment when the
markets collectively recognize that stocks (all
stocks) are overpriced and the bubble will
burst. This will simply lead our economy to
a point from where recovery would still
become difficult. Also at times, few Central
Banks tries to monetize the Governments
deficits and to cap governments borrowing
rates which only lead to inflationary pressures
and leaves detrimental scares on countries
economy.
A Better Quantitative Easing
Increasing application of QE, in one or the
other form, by various major economies
makes it a significant unconventional
monetary tool, especially when an economy
faces Liquidity trap. But rather than being
myopic in approach, one need to consider
long term outcomes of QE, both positive and
negative, and only can then it be confirmed as
a helpful resort for an economy.
After learning lessons from historical
instances and considering advance economy
dynamics, following are the prime
recommendations,
1. There is little evidence that QE, in its current
form, is helping small and medium size
businesses to expand and create more jobs.
On the other hand it is certainly helping to
enrich (or diplomatically capitalize) the major
financial institutions. Banks have also been
observed arguing that there are no borrowers
(by which they mean borrowers at the going
interest rates). To overcome this blockage, the
Central bank should set up a National
Investment Bank which they would capitalize
and mandate to spend some fixed crores of
rupees a year on investment projects at
interest rate low enough to fulfill the
investment mandate. Candidate for such
investment would be infrastructure projects
such as high speed rail, innovative water
supply systems for rural India etc. which
promises direct growth in employment rates.
2. It is of utmost importance for the Central
Bank to undertake diversified investment
portfolio rather than focusing on Government
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bonds and securities because if it loses money
on its particular sector focused asset
purchases, then that loss would have to be
made good by taxpayers either with higher
future taxation or by the Central Bank by
creating more money and risking higher
future inflation.
3. Also, before undertaking QE, an important
question to be asked by the Central Bank is,
How much is enough?, because going too
far with creating and spending money may
devalue the currency. Inflation or even
hyperinflation would then be the result.
On the basis of various facts and figures,
lessons learnt from both successful and
unsuccessful QE programs and dynamics of
advance economics, its gives me an
impression that if QE lacks rigor and
aggression in its implementation, it may
become a potential curse for any economy.
To make QE a lasting blessing, it is very
important incorporate a customized QE i.e.
including all sectors while distributing new
money into economy.
Article by -
Tushar Shah
School of Petroleum Management
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Eurozone Crisis: Gold to the Rescue
It doesnt take a degree in economics for
the average Indian woman to decide to
invest in Gold. The reason behind her
choice of Gold over other forms of
investments is simple: beauty, value
appreciation and security. While we may
ignore the vanity quotient associated with
Gold, it only makes sense to consider the
value appreciation and security it offers
vis--vis any other form of investment.
What an average Indian woman
understands about Gold is about the only
basis on which one may base ones
assumption that Gold has the potential to
substantially alleviate the Eurozone Crisis.
While all that glitters might not be Gold,
one certainly cannot deny the fact that the
glitter of Gold carries with it a minimal
credit risk. Unlike national currencies,
value of Gold is not dependent on a
nations economic policies and carries
negligible inflation and exchange risks. So,
what does an average Indian woman do
when her family faces a crisis situation and
needs money? She either sells off her Gold
to generate liquid cash or borrows money
against the collateral of her Gold. Well, the
situation of the Eurozone is somewhat
similar to that of this average Indian
woman! The Euro area is in a crisis and is
also sitting on a pile of Gold; 10,792
tonnes of Gold. Common sense dictates
that the outright sale of the Gold reserves
of the Eurozone is not the solution to the
problem. This is primarily due to the fact
that existing European Union laws prohibit
such sale of Gold as do the provisions of
the Central Bank Gold Agreement.
Moreover, the outstanding debt levels of
the Eurozone countries far surpass the
value of their Gold reserves. The Gold
holdings of the crisis-hit Eurozone
countries (Portugal, Spain, Greece, Ireland
and Italy) represent only 3.3% of the
combined outstanding debt of their central
governments. A one-time sale of all of
their Gold reserves would barely cover one
years worth of their debt service costs.
What then is the alternative? The
alternative comes in the form of using gold
reserves to collateralize government debt.
The idea is to bring down borrowing costs
by using Gold to guarantee the partial
repayment of bonds to investors in case of
a default. Gold would serve to provide
sovereign bonds with further safety and
thus comfort investors who do not give
credence to Eurozone government balance
sheets any more. Historically, Gold has
been successfully used as collateral. In
1970, Italy and Portugal employed their
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19
Gold reserves as collateral to loans from
the Bundesbank, the Bank for International
Settlements and the Swiss National Bank.
In 1991, India applied its Gold as collateral
for a loan with the Bank of Japan. The
proposal to use Gold as collateral for
government carries with it advantages for
the Eurozone. They include:
The Eurozone is not based on a Gold
standard and hence Gold is not a monetary
asset. The proposal applies not to the Gold
held by the European Central Bank (ECB)
for the management of the Euro but to the
Gold reserves held by the National
Commercial Banks (NCB).
Monetary purchases by the ECB of
government debt of an individual Member
State constitutes a fiscal transfer, because
assets held in common over the Eurozone
as a whole are used for the benefit of an
individual Member State. But NCB owned
Gold is an asset owned by an individual
Member State. So the use of the Gold
would not involve a fiscal transfer between
states but, rather, the use of the assets of a
state for the interests of that state.
Unlike a monetary asset, Gold is available
in restricted amounts. The ECB could
theoretically produce unlimited quantities
of new euros to purchase additional
sovereign bonds. But the amount of Gold
available as collateral sovereign debt is the
amount held by the NCBs. This is an
important disciplining factor.
While the problems of the average Indian
woman are not as complex or humongous
as those of the Eurozone nations, fact
remains that the time has come for the
Eurozone to realise the true potential of the
Gold reserves held by them (6.5% of all
Gold ever mined!). The legal issues that
need to be considered for Gold backed
bonds to proceed are surmountable. For
the Eurozone countries that have built up
substantial reserves of Gold over the years
now could be the time to harness the
benefits.
Article by -
Namrata Shah
Nihal Adsul
JBIMS, Mumbai
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20
Declining corporate investment and implications
Even though IIP has shown some recovery
from its sharp fall a few months back and a
marginal fall in inflation, corporate
investments are still not indicating any bright
scenario. Indeed, as suggested by SBI and
other banks, the corporate pipeline is pretty
tight and is not expected to be flourishing
soon in the immediate future. As rightly
pointed out, the capital expenditure in large
number of industries is lacking. It is not to
say that the potential or opportunities do not
exist, what lacks is the willingness to take
projects and indulge in large expenditures and
borrowings.
This is one of the reasons that the banks have
been asking for lower rates by RBI, and
supporting reforms by the Government. There
is an increasing need to provide greater
incentives for greater capital expenditure in
industries. This is particularly important for
pushing growth and improving performance
of Indian economy in medium and long run.
Global Crisis and Declining Capital
Investments
India saw a significant growth prior to Global
Crisis with large amount of investments been
undertaken by both private and public sector.
Before the global financial crisis, strong
corporate investment was very evident and
well above levels in most emerging
economies (as % of GDP). But the picture
has been bleak since 2009, with a sharp
decrease as % of GDP from 14% prior to
2009 to 10% thereafter. Indeed, the growth of
investment (gross fixed capital formation) has
slowed to about 0.6% (quarter on quarter) on
average in the first three quarters in 2011,
compared with an average of nearly 3%
during 200007, and the figures only
weakened further in the coming future.
Factors
Number of factors has been cited to influence
the weakening of corporate investments.
- Increased macroeconomic uncertainty with
high inflation
- Weaker global economic outlook with
European Union also facing recession
- Monetary tightening since early 2010 by RBI
and rising interest rates
- Structural factors such as weakening
governance and slower project approvals
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21
Implications
This weak corporate investment performance
has demand and supply implications.
- It will lead to lower growth over the medium
term
- It would also enhance supply constraints in
already supply constrained Indian economy
Capital Expenditure and Banks
Corporate Lending
Macro-picture
The GDP growth of India has been lower in
2011-12 at 6.5 % as compared to 8.4% in
2010-11. The growth rate had been
continuously declining over the 4 quarter
2011-12 financial year, and was reflected in
declining figures of manufacturing sector.
Due to such developments and reasons
discussed earlier, the investment intentions in
2011-12 showed a setback. With still high
inflation and interest rates, the investment
outlook for 2012-13 remains subdued. But at
the same time with reforms it is expected to
see revival, though at a moderate pace.
Bank's Perspectives
SBI has recently sanctioned large loans to
Tata Steel and Hindalco. But even so it not
yet satisfied with the performance of its
corporate line which has been quite dried up
for last few months. It still does not expect a
significant improvement in loan demand, at
least in the near term.
Projected Capital Expenditure
From the above diagram the effect of crisis on
capital expenditure can be clearly visualized.
In 2011-12, banks and financial institutions
sanctioned only 668 projects with proposed
investments of Rs 212,000 crore. This was
significantly lower than the previous financial
year and shows the setback. According to
RBI, the planned capital expenditure for the
current financial year was estimated around
Rs 207,300 crore, even lower than the 2011-
12 level.
640
660
680
700
720
2010-11 2011-12
Projects Sanctioned
0
200000
400000
600000
2010-11 2011-12
Proposed Investments (Rs. Crore)
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22
Industries Outlook
From the above graph, it can be seen that
certain sectors are clearly stronger for
investments as compared to others. As can be
observed, most capital intensive sectors are
showing a decline in their investments and
can be a cause of concern in the medium
term. Manufacturing in India needs to pick up
pace and can provide an impetus to
investments in growth generating capital
expenditure in India.
There are some PSUs such as BHEL, NTPC
and ONGC with hoards of cash on their
balance sheets. The plans earlier made by
the government are non-existent, and
dependency on external factors has been
increased for any improvement or growth. It
is important for these capital extensive and
surplus PSUs to start pushing for capital
expenditure, which can further kick-start a
growth cycle in Indian economy. Without
these sectors contribution, growth in medium
and long term would be difficult to achieve
and sustain.
India still has a strong position and great
potential to grow. Though its savings and
consumption rates have shown a marginal
slowdown recently, it is still comparatively
high. Thus, the opportunity for investment
still exists. With large population, rising
consumption, and favourable demographics, a
lot of opportunities await.
Whether PSUs or private sector; well funded
companies confident of growth prospects
must build capacities before competition
catches up.
Conclusion
While banks such as SBI has shown
pessimistic opinion, there are also some
banks are optimistic about the 2nd
half of the
2012-13 though agree that recovery would be
slow.
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23
Corporate investments are not only an
important indicator the growth and stability of
an economy, but also a critical factor in
ensuring growth for the economy in the
medium and long run. With not enough
capital expenditure, the resource mobilization
in the economy would be lower which would
further spread into the real economy and
create undesirable stirs.
This is also important for the banking sector
to grow and expand. Without funds being
used or invested in the capital investments, it
would face difficulties of diversification and
returns on investments.
Various banks and RBI as well do recognize
the problem of low corporate investments. As
corporate investments are strongly influenced
by the unstable macroeconomics of the
moment, it has been rightfully argued again
and again that capital intensive sectors such
as fertilizers and petroleum should lead the
way. These sectors have been dominated by
the public units and therefore it is required for
the Government to realize the need for kick-
starting capital expenditure and draw as well
as implement the required plans of action
soon.
There is renewed business confidence as
reflected in the behaviour of the stock
market. The reforms are small stepping
stones that will provide a springboard for
capital expenditure. Obviously, there is a
lag effect and full-scale revival will take
some more time.
Rana Kapoor, MD, YES Bank
Article by -
Sonika Toora
FMS, Delhi
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24
Small and Medium Enterprise Exchanges
The decision of SEBI to grant permissions to
NSE and BSE for setting up SME Exchange
has opened up a new chapter in the history
of SMEs by aiding them to raise funds in a
more effective, transparent and faster way.
India has registered a high economic growth
in the past decade and nurturing the SME has
become imperative to aid the growth engine
in our country. The decision goes hand in
hand with the governmental agenda of greater
financial inclusion for the SME. For a
country like India whose 40% of the direct
exports are contributed by SMEs, the NSE
Emerge and BSE SME exchange are
platforms to match the capital hungry SMEs
with the retail investors. With a 45%
contribution to GDP of India, SMEs also play
an important role in contributing towards
employment. At present over 24 countries
provide independent boards and exchanges
for SME examples being the Growth
Enterprises Market (GEM), Hong Kong,
MOTHERS, Japan, the Alternative
Investment Market (AIM) in the United
Kingdom, NASDAQ in the USA.
The exchanges will provide an
opportunity for the enterprise to ideally
restructure their debt equity capital ratio.
Generally the SME have been heavily relying
on funding from financial institutions thereby
increasing more debt liability and problem of
over leveraging from banks. The loans at
rates as high as 16% affect their investment
decisions. A crunch of monetary resources
might cause some of them to opt for cheaper
options of technology, skill and
manufacturing that hamper the exposure to
new trends and future growth.
SMEs participating in the exchanges
will be required to submit all the details
pertaining to investments and their use. This
will make the process more transparent,
arouse a sense of trust in the minds of
investors and give impetus to SMEs to access
the retail funds. Scripps of SME belonging to
the main boards of the exchanges faced the
problem of illiquidity due to poor trade
volumes. The setup of a trading platform and
the separation from the big stocks in the
industry can provide a solution to the
problem. Although there will be some time
before the stocks pick up some liquidity.
Market making is a way to add liquidity to
the stock.
The BSE has also come up with the
BSE SME index, an addition to its existing 28
indices. It will track the value of companies
for two years post the completion of its IPO
(Initial Public Offering). Amidst a surge of
IPOs in the market, unstable economic
conditions, threat of shares being traded
below their listing price and even the
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25
government making strong attempts to
achieve its target disinvestment in PSUs , the
future still seems bright for SME IPOs as
stats show that out of 11 companies listed on
BSE, 10 have been trading above their listing
price in 2011.
SME growth has various dimensions.
India has evolved from being an agrarian to a
service industry based economy. It seems to
have majorly missed the step of being a
manufacturing economy before marching to
service industry growth. The success rate of
small enterprises will also help ensure good
manufacturing segment advancement. The
picture seems good but the high cost of
capital, limited awareness; regulatory
requirements in disclosures come forward as
hindrances to raising of equity capital.
However BSE seems to have been trying to
overcome the awareness problem by
conducting several seminars (both general
and sectored) for educating the SMEs on the
benefits of listing and the preparations
required for the same The failed attempts of
government in the past with the setup of the
Over the Counter Exchange and the Indonext
in 2007 raises questions about the success of
the BSE and NSEs latest attempts with the
SME Exchange.
To increase participation from
companies to get listed on the new bourse,
SEBI has relaxed norms in terms of reducing
reporting frequencies (quarterly to bi
annually), exemption from tracking previous
profits, etc. Can this hamper the success of
SME exchange? The SEBI will not give any
recommendations to the merchant copy filed
by the banker. The considerably small sized
company listing might be a no-no factor for
the investment banks who find it easier to get
a bigger company listed on the main board.
Due to this the structure of these junior
exchanges stipulated by the regulators the
reliance seems more on market makers and
less on the platform itself.
Nonetheless with around 13 million
existing SMEs in the nation, need for better
communication resources, advanced
technology and ease of operations, one can
expect SME exchanges to succeed in the long
run and create a better India.Inc
Article by -
Neha Joshi
FMS, Delhi
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26
US Fiscal Cliff: What Lies Ahead?
The United States fiscal cliff can be
referred to the economic effects that could
result from the tax increases and spending
cuts that will be in practice from 2013 if
existing laws are not changed. These laws
on one hand will reduce fiscal deficit to a
great extent but also has the potential to
hinder economic growth pushing the
country to recession. Hence there are
arguments and counter-arguments for and
against for fiscal adjustment. In the article
we will discuss the following aspects of
the fiscal cliff:
Alternatives put forward by CBO
Components of the fiscal cliff
Need for the fiscal adjustment
Limits and targets to fiscal
restructuring
Effect on world economy
Our outlook and conclusion
Alternatives put forward by CBO
Congressional Budget Office (CBO) is
responsible for providing economic data to
the US government. It is a federal agency
under the legislative branch of the US
government.
The fiscal cliff and the steps taken to
mitigate it will have effects on the fiscal
deficit i.e. the debt and tax revenues. The
CBO has put forward two scenarios for the
coming 10 years.
The baseline scenario: This
scenario will result if current laws
are not altered. This will result in
lower deficits and debt combined
with spending cuts and higher
taxes.
The alternate scenario: This
scenario will result when some
specific laws are changed to
reverse or stall the effects of the
fiscal cliff.
The following graph obtained from a CBO
report shows the pronounced difference
between the two scenarios. If no action is
taken to alter the current laws, the
economic scenario closely resembles the
baseline projection. On the other hand if
the fiscal cliff is not succumbed to and
some tax cuts and spending patterns are
continued we will have a scenario
resembling the alternate scenario.
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27
Baseline projection:
The CBO since 1985 has been publishing
baseline predictions for the coming fiscal
years.
The positives:
The estimate they have come up with
shows that fiscal deficit will come down to
an estimated 1.2% by 2012 from 8.5% of
GDP in 2011.
Revenues would rise from 18% (historical
average) to 24% of GDP.
Debt reduction of about 7 billion USD vs
increases of debt by 10-11 billion USD if
current policies are extended.
The negatives:
The GDP growth is likely to be reduced
from 1.1% to 0.5% in the short run.
High chance of recession in the initial part
of the year followed by 2.3% in the second
half.
Alternate fiscal scenario:
The positives:
Economic slowdown can be avoided in the
short run especially in this time of high
unemployment
The negatives:
Revenues will remain on and around the
historical average of 18% GDP.
Public debt rises from 69% GDP in 2011
to 190% GDP by 2035
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28
Components of the fiscal cliff
1. Economic Growth and Tax Relief
Reconciliation Act (EGTRRA) and Jobs
and Growth Tax Relief Reconciliation
Act (JGTRRA):
These laws combined have cut government
revenue by about 2.6 percentage points of
the GDP. A large permanent tax cut may
have looked feasible a decade ago after the
budget surpluses of the late 1990s, but it
looks far less feasible today, after three
years of fiscal deficits close to 10 percent
of GDP and a surge in debt held by the
public from about 40 to about 70 percent
of GDP.
2. Expiration of temporary payroll tax cut:
This tax cut has temporarily eliminated 2
percentage points out of the employees
6.2 percent Social Security tax on the first
$110,000 of salary.
3. The compromise budget control act:
This act provided that if a super committee
could not agree on fiscal cuts, an automatic
mechanism beginning in 2013 would cut
spending by $109 billion annually, divided
evenly between defense and nondefense
non-entitlement spending.
4. Expiration of emergency unemployment
benefits and surge of collection of alternate
minimum tax (AMT):
The two components of the monetary budget
repeatedly dealt with annual fixes.
Category FY2013 CY2013e
Revenue Increases
Expiration of certain
provisions in income
tax, estate tax, and
AMT indexation at
end-2012
221 294
Expiration of employees
payroll tax reduction 95 126
Other expiring provisions 65 86
Taxes in the Affordable
Care Act 18 24
Subtotal 399 531
Spending reductions
Automatic cuts, Budget
Control Act 65 86
Expiration of emergency
unemployment
benefits
26 35
Reduction in Medicare
payment rates for
physicians
11 15
Subtotal 103 137
Other revenue and
spending changes 105 140
Total reduction in
deficit: Direct (% of
GDP)
607(3.7) 807(4.9)
Effect of economic
feedback -47 -62
Total change (% of GDP) 560(3.4) 745(4.5)
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29
The table put forward by a CBO report lists
down the major components of the fiscal cliff
and their respective sizes. Table 1
summarizes the components of the fiscal cliff.
The first column reports the impact of the
fiscal cliff for the portion of FY2013 after
December 2012, a nine-month period. The
final column annualizes these amounts to
obtain an approximation of the full effect for
calendar year 2013. On an annual basis the
total impact of the fiscal cliff amounts to a
reduction in the federal budget deficit of
about $800 billion.
The need for fiscal adjustment
The US fiscal history can be divided into two
parts:
1. From 1990-2007: Government revenues
were around 18% of GDP while spending
was about 20%
2. From 2007-2011: Government revenues went
down to 15.8% of GDP while spending rose
to 23.5%
Thus the government fiscal deficit also rose
during the second phase. The fiscal cliff
hence seems to be a necessary evil.
However there will be a loss of 1.6% of GDP
in the short term on submitting passively to
the current scenario. This sacrifice on GDP
will mean loss of demand and will result in
higher unemployment. Again reduction in
demand would mean a sacrifice in potential
output rather than a redeployment of
resources from use in government purposes to
use in private purposes. If instead there were
no excess capacity and unemployment were
at, say, 4 to 5 percent, a case could be made
to simply allow the fiscal cliff effects to
happen.
Limits and targets to fiscal restructuring
The fiscal restructuring should look at the
following targets. These targets are
formulated keeping in mind the long term as
well as short term requirements in the
economy.
Overall, in the medium term federal spending
needs to be held down to a range of 20 to 22
percent of GDP and federal revenue needs to
recover to a range of 18 to 19 percent of
GDP.
For the financial year of 2013 CBO has
projected government spending to be at
23.5% of GDP which will result in a deficit of
7.2% in the alternate scenario. Thus the basic
target will be to raise revenue by 1.5 to 3
percent and cut spending to around 1.5 to 3.5
%.
Suppose for simplicity one were to adopt the
averages of these ranges as the targets,
placing the spending cut at 2.5 percent of
GDP (to 21 percent of GDP) and the revenue
increase at 2.2 percent of GDP (to 18.5
percent of GDP). The medium-term deficit
would then be 2.5 percent of GDP.
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30
Effect on Indian Economy
Since the India is not one of the countries that
exports manufacturing outputs to the United
States the only sector that can be affected is
the services sector. Again services industry
will not be affected much as it is majorly a
cost cutting measure to outsource for the US
companies.
The US indices are currently trading very
close to an all time highs. So it is natural for
them to fall at the beginning of 2013 when
the US economy finally falls off the cliff.
Some experts are of the opinion that the
equity markets of countries like India might
be a safe bet for investments. However these
markets share a positive correlation with
market performance of the west. Hence any
fall in US markets due to a fiscal cliff could
cause a fall in all emerging stock markets
including India.
Effect on other economies
According to a CNN report the failure of the
US political class to deal with the fiscal
emergency correctly can affect economies
world over. The following are pointed out as
possible outcomes:
The GDP of China might take a direct hit
from the fiscal cliff baseline scenario. The
major reasons will be decrease of trade with
the US. There will be also impact due to
changes in inflation and interest rates.
Countries like Singapore and Switzerland
which are dependent on exports will also face
slowing down of economy. The projected fall
of growth in Singapore will be about 0.2%.
The model proposed by UN estimates decline
in both direct and indirect trade.
Our Outlook
The fiscal cliff scenario requires pragmatism.
The importance of pragmatism i.e. balancing
long-term reduction of fiscal deficit with
actions that would not result in slowing down
the economy in the short-run cannot be over
emphasized.
In general the US government has to look
back at the components of the cliff
objectively and decide on the elements that
are desirable and the ones that can be
avoided. A complete submission to the
scenario may be just as bad as taking steps to
stall the change altogether. A time phased
implementation of the changes is what is
desirable.
Just for example the tax cuts that are currently
in place and will expire in the coming year
can be done away with the top 5% of the
population while can be continued for the
rest. As the major tax earnings of the
government comes from the tip of this
pyramid the government will not lose much
in terms of revenues while a major chunk of
the population can be protected from the
impact.
A focused approach we believe will be a
much better way to go about things rather
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31
than taking the route of across the board tax
increases and spending cuts.
Conclusion
As discussed in the article in our opinion
succumbing to fiscal cliff will not be right
due to the current state of the economy and
the levels of unemployment. There has been
a lot of procrastination involved in the
process given the presidential elections. But
now the situation is ominous and steps need
to be taken proactively. Targeted relaxation
of taxes and spending cuts as suggested by a
lot of experts may be the way to go forward
and possibly only way to protect small and
midcap enterprises.
As far as the common man is considered,
these are our suggestions for him:
Play it safe: It is our suggestion to move to
investments which have low risk and regular
returns. It is also advised to take into
consideration the exit options while making
an investment.
Go high on savings and cut down expenses:
Cut down on debts especially avoidable ones
like credit cards. Plan to make healthy
savings and move towards value with your
purchases rather than going for flashy.
Be opportunistic: The fiscal cliff will bring
with itself lower interest rates which will be a
good opportunity for purchase of useful
assets. The opportunities need to taken with
both hands.
Article by -
Prajata Das Chowdhury
Shilpa Sardar
FMS, Delhi
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32
2G Spectrum Auction An Autopsy
Abraham Lincoln once said, You may fool
all the people some of the time, you can even
fool some of the people all of the time, but
you cannot fool all of the people all the time.
The government of India came up with
another round of auction of telecom licenses
between 12 -14 November 2012. This
happened due to the result of canceling of 122
2G licenses by Supreme Court of India in
February 2012. The spectrum was issued
along with the licenses by the Government on
a First Come First Serve basis. As per the
direction of the Apex Court, TRAI came up
with the base price which was almost 10
times the price paid by the operators earlier.
The Government Strategy
The first auction of spectrum, the airwaves
that carry telephony services, proved to be a
double-edged sword. In 2010, when the
government called bids for spectrum in the
2,100 megahertz (MHz) band, which enables
the data-intensive third generation (3G)
services, only a small amount of it was on
offer, creating an artificial scarcity.
Spectrum-starved companies, which had to
either have 3G in their bouquet of offerings or
lose high paying data users, bid the moon.
The auction magically repaired the
government's finances by netting more than
Rs 67,000 crore but put the companies on a
debt track. For the auction conducted in this
period of 12-14 November, only spectrum in
the less efficient 1800 MHz was put on
auction, keeping aside the precious spectrum
in the 900MHz bandwidth. The government
might have done this because it wants to keep
that spectrum aside to re-farm the leading
incumbents away from their precious 900
MHz spectrum. Another reason of not coming
up with complete spectrum for auction was
creating an artificial scarcity and also it was
highly anticipated that RIL would also bid for
the 2G spectrum and the incumbents will try
every bit to keep it out of the market. But
nothing, as anticipated, happened and RIL
chose to keep away from the auction.
Technically, a 900MHz BW is more suitable
for rural areas, where the population density
is less, as the wavelength is longer than the
1800 MHz, which is suitable for urban areas
with high population density. (Frequency and
wavelength are inversely proportional). Yet in
the auction we saw operators choosing
spectrum in 1800 MHz band in the UP East
and Bihar (Idea, Vodafone, Telewings and
Videocon got spectrum in Bihar; Vodafone,
Telewings, Videocon got spectrum in UP
(East). This could be because they had no
other options and the operators might expect
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33
growth in the user base from the untapped rural markets in these circles.
Operator Amount (in Rs) No. of Circles
Bharti 12,295 13
Vodafone 11,618 9
BSNL 10,190 20
Reliance Comm 8,585 13
MTNL 6,564 2
Aircel 6,449 13
Tata Teleservices 8,864 9
Idea 5,769 11
S Tel 338 3
RESULTS OF SPECTRUM AUCTION NOV 2012
Operator Circle in which operators participated Total Payout
Metro Circle A Circle B Circle C Circles (Rs Mn)
Telewings* 3 2 1 6 40183
Videocon 1 4 1 6 22214
Idea 1 1 1 5 8 20313
Vodafone 1 7 6 14 11279
Bharti 1 1 87
Total 1 6 14 14 35 94076
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34
On August 03, 2012, the Union Cabinet
approved the reserve price of Rs. 14,000
crore for 5 MHz pan-India (22 telecom
circles) spectrum for 1800 MHz band. This
was 23% lower than the Rs. 18,110 crore
recommended by the Telecom Regulatory
Authority of India (TRAI) in April 2012,
and at the lower end of Rs.14,000-16,000
crore reserve price recommended by the
Empowered Group of Ministers (EGoM).
However, the price was more than seven
times the Rs. 1659 crore at which the
cancelled spectrum was awarded in the
first place in 2008. The Union Cabinet also
approved the recommendation of EGoM
for reserve price for 800 MHz band at 1.3
times that of 1800 MHz band. Thus, the
reserve price for 5MHz of spectrum in 800
MHz band stands at Rs. 18,200 crore.
From the above table it is clear that there
were no bids for the most coveted circles
of Mumbai and Delhi. Existing players
like Bharti Airtel and Vodafone dont need
spectrum at these high reserve prices while
it may prove out to be too costly for the
new entrants with already loss making
operations.
Amount to be paid (Rs. Mn)
Circle
Reserve
Price Rs.
Mn/bloc
k
Auctione
d Slots
Winning
Bids Rs
Mn/block Telewings Videocon Idea Vodafone Bharti Total
Delhi 6931 0
Metro Kolkata 1137 4 1137 4548 4548
Mumbai 6785 0
AP 2869 4 2869 11476 11476
Gujarat 2248 8 2248 8994 8994 17988
Circle A Karnataka 3301 0
Maharashtra 2628 5 2628 10512 2628 13140
TN 3061 4 3061 12244 12244
Haryana 465 6 465 1861 930 2791
Kerala 653 1 653 653 653
MP 540 6 540 2160 1080 3240
Circle B Punjab 673 1 673 673 673
Rajasthan 671 0
UP East 762 9 762 3047 3047 762 6856
UP West 1074 10 1074 4296 4296 2148 10740
WB 258 7 258 1292 517 1809
Assam 87 7 87 347 173 87 607
Bihar* 425 11 464 464 929 1393
Circle C HP 78 1 78 1857 1857 78 3792
J&K 63 6 63 253 127 380
NE 88 6 88 354 177 531
Orissa 203 6 203 811 405 1216
TOTAL 35000 40182 22215 20313 11280 87 94077
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35
The other side of no bid for for these
circles is that the players did not want to
set up a market price for the spectrum
when the government goes for re-farming
of the spectrum in the 900MHz band.
(Bharti Airtel and Vodafone hold licenses
in these circles since 1994 and the licenses
would be up for re-auction in 2014 when
they expire)
Impact on the Operators: The
government might have missed on its
target of garnering Rs 40000 crores in the
auctions but it emerged as a breather for
the operators and the public in general. By
not fully participating in the auctions the
operators managed not to get more debt on
their already debt laden balance sheet. This
also benefitted the general masses for
some time by not giving a reason for tariff
hikes to the operators. The positive impact
can easily be seen from the stock
movement of the players on the exchange,
where every player gained from its
position before the auctions.
But the industry has its own woes. The
much anticipated 3G data wave didnt flow
well. As of now majority of the revenue,
around 90% still comes from voice.
Industry experts are of view that Indian
telecom might start getting close to 50% of
its revenue from data services by 2016.
But by then the equation would have
another major change. RIL is expected to
be out with its 4G services and this factor
accounts mainly in the projection of 50%
revenue share from data services. The
above table supports Telewings decision to
operate in the Indian market solely on
voice for the coming period in the short-
run.
Idea, Videocon, Telewings were in the
hunt to get their licenses back. Only
Vodafone, which bid in 14 circles, was
looking to augment its spectrum bank.
Country
Non-Voice
Revenues
India 12%
Spain 19%
South
Korea 21.70%
France 25.40%
Canada 25.70%
US 33.20%
Japan 48.70%
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36
Naturally, the bids were feeble, and in
many cases there were none at all. Four of
the 22 circles, including the biggest
markets of Delhi and Mumbai, received no
bids. Of the 18 that did, only the bid for
Bihar was above the reserve price, albeit
only nine per cent above. The other 17
were won at the reserve price-an indicator
of an auction's failure. The government has
accepted its failure which is evident from
its current decision to slash the reserve
prices by 30% in the four circles (Delhi,
Mumbai, Karnataka and Rajasthan) which
saw no bid from the telecom operators.
The remaining and the un-auctioned
bandwidth would once again be put for
auctions before the end of this financial
year. The government would try to get its
pricing and regulatory environment right
to induce players to come with open
wallets to the auction to help it nurse its
fiscal deficit wound. On the other hand,
operators would carefully asses the market,
the competition, their own spectrum
bouquet which expires in 2014 and plan
carefully to buy spectrum in the required
bandwidth to support their operations.
Article by -
Ashish Jaiswal
Rounak Chandak
FMS, Delhi
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37
Bank Restructuring
Within three months of Standard &
Poors downgrade in April, global rating
agency Fitch, on 18th June, has
downgraded Indias sovereign credit
outlook from stable to negative citing the
reasons as corruption and the absence of
adequate reforms. The agency estimated
general government debt for India of 66
percent of GDP at the end of the most
recent fiscal year, compared with a median
of 39 percent for BBB-rated countries
.While the government took the defensive
stance in S&Ps downgrade, it criticized
the Fitch downgrade saying the rating
agency observations were based on old
data and did not reflect the recent
developments. Fitch revised downward
credit rating outlook of 12 financial
agencies, including State Bank of India
(SBI), ICICI bank, and Punjab National
Bank (PNB). The list of downgraded
entities includes six PSUs and two private
banks. These include Bank of Baroda
(BoB) and its overseas subsidiary Bank of
Baroda (New Zealand), Canara Bank IDBI
Bank and Axis Bank. Others to be affected
by the rating action include Export-Import
Bank of India, Hudco, IDFC and Indian
Railway Finance Corporation. Alongside,
the rating agency also downgraded the
credit outlook of seven PSUs NTPC,
SAIL, IOC, PFC, GAIL, REC and
NHPC.While the markets had already
anticipated that Fitch would revise the
outlook and so there is no surprise in the
announcement but the question is Can we
rely on the rating and take adequate steps
to promote major reforms or its just the
hiatus with no prolonged effects on Indian
economy?
Downgrading of any countrys credit
outlook has several effects on economy
such as-
1. Expensive Credit
2. Less allocation of investments
3. Less Private Equity
4. Flight of Capital outside India
5. Stock Market Sell Offs
6. Currency Depreciation
7. Less New Business Ventures
8. Less Employment
9. Rating Downgrade of the
Corporate
10. Reputation Damage
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38
If we see a broad range of factors such as
macroeconomic policy, economy and
public finances we can see India is facing
an awkward combination of slow growth
and elevated inflation as well as structural
challenges surrounding its investment
climate in the form of corruption and
inadequate reforms. The Indian
government had repeatedly delayed tax
and subsidy reforms and thus the
confluence of weaker economic growth
and a large subsidy bill which means India
will likely miss the 5.1% fiscal deficit
target for 2012-13.But on the other hand
Fitch has not taken note of recent
government initiatives including fertilizer
subsidy reform, capping of subsidies as a
fraction of GDP, the new manufacturing
policy and the telecom policy. The fact
that Foreign institutional investors (FII)
have already brought in $12.5 billion in
the first five months of 2012 as compared
to $8.3 billion invested during the full
calendar year of 2011 cannot be ignored.
Do we need to pay attention to these
ratings and design our framework or do we
need to see more intrinsic problems in our
country? The reactions of domestic policy
to these downgrades are of much greater
concern than actual analysis and prediction
of these agencies. The accountability and
responsibility of these credit rating
agencies are also in question. When it
became clear in the United States that
much of their analysis was wrong which
led to many investors putting their
investments in risky and sometime even
fraudulent financial assets, these agencies
were of the view that they should not be
held responsible as they were only giving
opinions. But the fact of the matter is that
such opinions have huge impact on the
global markets and economy. Recently
these credit rating agencies have played
dangerous games pushing for more
financial liberalization reforms that are in
there own interests all in the name of
analysis and opinions. Fitch has cited
corruption as one of the reason for the
downgrade. Is this a new thing to India?
Was there no corruption in India few years
ago when Fitch was so optimistic about
Indian economy when compared to the rest
of world economy? Fitch has also cited
lack of reforms as one of the reasons.
This is an open push for reforms to benefit
large corporate capital in finance and
elsewhere, which is not at all the same
thing as policy changes that will put the
Indian economy on a sustainable and
employment-generating growth path. It is
certainly true that the recent Indian success
has been based in large part on the
perceptions of global capital, which
generated capital inflows. But these
inflows have not really been of the kind
that generates more productive capacity
and work along with access to new
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39
technologies and markets. Rather, financial
inflows have dominated, and have
contributed to a boom driven by consumer
credit (including for real estate) and debt-
driven high spending by corporations,
generating growing current deficits in the
process. It has not provided better living
standards and employment for the bulk of
the population. To ensure more inclusive
growth the Indian economy needs to head
to a different path based on generating
more employment and better living
standards. This is not likely or even
possible given the incentives created by
the past pattern of capital inflows. If
anything, such incentives actually militate
against such a desirable change in strategy.
Its true that Fitch reduced their credit
rating outlook from stable to negative but
the Bombay Stock Exchange reported
gains of between 0.23% and 1.39% in
shares of State Bank of India, ICCI, Axis
Bank, Bank of Baroda, Canara Bank and
IDBI. Investors are tired of downgrades.
That is why these stocks did not show any
adverse reaction to the Fitch rating
outlook. As far as growth is concerned its
a matter of perspective. At most
conservative estimates, India's economy is
at present growing at around 5% and is
expected to expand at least 6% annually
for the next five years. Only China has
reported a better gross domestic product
(GDP) growth in the past five years. US
GDP growth is at about 2.2%. The Indian
economy has numerous positives - such as
an enviable 37% of its GDP in gross
national savings (GNS), over three times
the figure for the United States, with
Indian households saving about $1.1
trillion in the past five years. Two-thirds of
India's population is below 35 years of
age, and the growing middle class is
expected to form 60% of India's income
profile in the coming decade. High
domestic savings rates, high investment
rates, demographic dividends and a
burgeoning middle class with high
purchasing power are also the positives
for India. But among these positives there
are few concerns too. Against the
backdrop of persistent inflation pressures
and weak public finances, there is an even
greater onus on effective government
policies and reforms that would ensure
India can navigate the turbulent global
economic and financial environment and
underpin confidence in the long-run
growth potential of the Indian economy.
Small and medium enterprises (SMEs)
must be supported and there is a need to
provide them with credit as they form a
core foundation of a sound Indian
economy and more so as demand of credit
from large investors are drying up, SMEs
have a vital role to play to bail out the
economy in times of crisis. Though it is
vital to know the consequences of a credit
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40
downgrade on the country and the
residents, but at the same time it is
important to know that a downgrade is not
permanent. It comes when the financial
position of a country deteriorates. If the
associated elements which have resulted in
the deterioration of the financial position
are rectified, the health will get restored
resulting in reinstating of the credit rating
or a Credit Rating Upgrade. Isnt that a
part and parcel of the regular economic
cycles? If we analyze the whole world
economy we find that we are living in a
very highly inter-connected world where
individual economies cannot remain
oblivious of happenings in other parts of
the globe. If we see the crisis in Europe
and partially in US, it is affecting the
exports as well as investments in India. So
if the whole world is more or less in
financial turmoil, we cannot expect India
as an exception. If life is about looking for
silver linings, the new negative ratings
could well serve as blessings in disguise.
India can benefit from cleaner and more
faithful foreign investment funds while a
weaker rupee could boost exports, force
the manufacturing sector to be less
dependent on imports, and so help to bring
about a more balanced economy. What is
currently needed in India are a series of
conscientious steps to from our
Government to clear the hurdles which are
acting as bottlenecks in the growth path of
the economy. Many of these hurdles are
just because of whims and fancies of the
politicians. Others require a long term
policy action to improve the infrastructure
of the economy to sustain long term
growth which paves the path of Indian
economy from a developing economy to a
Developed Economy. The problems in
Indian economy need to be addressed but
its not the credit ratings that make the
base for solutions.
Article by -
Sachin Pal
IMT, Ghaziabad
-
Investment opportunities in Solar Energy Sector in India
Introduction
India is deficit in power generation and the
public sector companies have not been able
to meet the increasing demands leading to a
huge demand-supply gap in the country. The
non-availability or high cost of fuel
associated with the power generation, the
government is looking at alternate sources of
energy to fill the ever increasing gap in
demand & supply.
Solar power generation in India is being
seen as a next big step in mitigating the
problems being faced by the distribution
companies of not meeting the demand of
customers.
Charanka Solar Plant, the 600 MW plant
known as Asias first and largest solar park
has been set up in the Gujarat state in Patan
district. The solar park completed by
December 1, 2012 is set up over 3000 acres
of wasteland bordering the Rann of Kutch
which will generate two-thirds of Indias
total 1050MW of Solar power generation.
The investment cost in Charanka Solar plant
amounts to US $280 million for the entire
functional, engineering, procurement &
maintenance of the park. The project
included some major developers from the
national and international market with over
84 project developers registering for the
project. With more national and
international companies showing interest in
the project and the power generation
capacity expected to increase to 1000MW
by 2013, the charanka solar plant has
undoubtedly given our nation a new ray of
hope in meeting Indias energy requirements
and also Indias mission to achieve 15% of
clean energy annually by 2020. (Gujarat
Solar Park, 2012)
Current Status of Solar projects in India
The amount of solar energy generation in
India till 2007 was less than 1% of the total
energy demand, which grew to 25MW in
2010 and 468 MW in 2011. By 2012 the
installed solar plants in India has increased
with the overall capacity of 1040 MW.
Various state governments are coming up
with new projects and are inviting the
developers to participate in the solar power
generation in their respective states. Gujarat
is the leader in solar power contributing
about 2/3rd
of Indias total solar power
generation. Rajasthan, the sunniest
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