ISSUE

VOLUME

Stats Watch .......

Sector wise GDP growth rate

Open Forum…….

Sports in Dire Need of a Real “Game Changer”

Cover Story .......

Banking Licenses - Entry with Riders

News ……

News on Industry and Emerging Markets

In Focus

Inflation Hurting Rich

Investeurs Chronicles

Outlook

Coal

September 2011, Volume: 27

Figure Facts

Forex

Forward Rates against INR as on 9thSeptember , 2011

Spot Rate 1 mth 3 mth 6 mth US 46.58 46.79 47.1 47.45 Euro 64.27 64.55 64.96 65.44 Sterling 74.17 74.49 74.94 75.43 Yen 59.94 60.24 60.69 61.22 Swiss Franc

52.91 53.21 53.66 54.22

Source: Hindu BusinessLine

Libor Rates

Libor % 1 mth 3 mth 6 mth 12 mth

US 0.22 0.33 0.50 0.82 Euro 1.28 1.47 1.68 2.03 Sterling 0.66 0.90 1.19 1.66 Yen 0.14 0.19 0.33 0.55 Swiss Franc 0.02 0.007 0.05 0.29

Forward Cover

1 mth 3 mth 6 mth

US 5.49% 4.53% 3.79% Euro 5.30% 4.35% 3.69% Sterling 5.25% 4.21% 3.44% Yen 6.09% 5.07% 4.33% Swiss Franc 6.90% 5.75% 5.02% as on 9th September, 2011 Source: Hindu BusinessLine

Commodities

Aluminum (1 kg) 108.75

Copper (1 Kg) 419.25

Zinc (1 kg) 101.25

Steel (1000kg) 30800

As on 9th September 2011

Call Rates as on 9thSeptember 2011

6.30% - 8.25%

Gold Silver

27115 27207

28274

61153

66097

Crude Oil ($) Dollar

112.46

114.22

45.8708

46.3843

Data from 29th August to 9th September

Sensex Nifty

16416.33

16866.97

4919.6

5059.45

YEAR

Coal

India produces around 4 million ton coking coal annually and imports around 92

million ton coal annually. Of the total import, around 28 million is coking coal and

the rest 64 million ton is thermal coking coal.

As per The Planning Commission forecast, coal shortage in India will soar to 200

million ton by the end of the 12th Plan (2012-17), with a demand of 1,000 million ton

against production of 800 million ton. Coal imports are rising at a fast pace, already

contributing to over 10% of our coal consumption. Next year, the shortage is

expected to be around 142 million ton with availability of 554 million ton against a

requirement of 696 million ton.

However, demand for Coking coal is likely to come down in the near future, since,

steel industry which happens to be one of the largest customers of coal is struggling

with its inability to pass on any hike in raw material to its client base.

On the global front, demand for coal is projected to take a hit on account of

decreased economic activities around the world and resumption of supplies from

the flood affected Queensland region in Australia.

According to market dynamics, weaker demand will obviously put a pressure on

coking coal suppliers to bring down prices. A correction in price is imminent. It has

gone up from $225 per ton to $330 per ton over a period of six months, up to May

2011. Coking coal prices are expected to decline as logistics issues are sorted

gradually in the Queensland region, bringing respite to steel, cement and power

companies. The market expectation is that coking coal price is likely to depreciate by

$30-$40 per ton but there may be a drop of $10 per ton on thermal coal. A drop in

global commodity prices and softening of crude oil coupled with a sluggish demand

from Japan are likely to have a cooling effect on coal prices.

“Capitalization”

Total amount of the various securities issued by a corporation.

Capitalization may include bonds, debentures, preferred and common

stock, and surplus.

Bonds and debentures are usually carried on the books of the issuing

company in terms of their par or face value. Preferred and common

shares may be carried in terms of par or stated value.

StatsWatch

Outlook -Coal

Gloss

Introduction

The Reserve Bank (RBI), on August 29, came out with draft guidelines for issuing new

banking licenses in the private sector. The guidelines cover a number of issues, including

promoter eligibility, corporate structure, capital requirement, foreign shareholding and the

business model for entities keen to enter the banking sector. It has laid down tough ground

rules for issuing new banking licenses, making it clear that it would be looking to cherry

pick industrial houses with squeaky clean reputations, diversified ownership, and with

little or no exposure to the real estate and broking businesses.

Once RBI receives the applications, these would be screened to ensure the eligibility

criteria are met. At the same time, the central bank would impose additional conditions to

determine the suitability of the applications. Further, those wanting to set up a bank will

have to first establish a wholly owned Non-Operative Holding Company, which will hold

the bank as well as all other financial services companies. This has been done to “ring

fence’’ the regulated financial services activities of the group, including the new bank, from

the other activities of the promoter group.

After screening the applicants, the applications would be sent to a high-level advisory

committee comprising eminent personalities from both within and outside the financial

sector. Though the advisory committee would submit its recommendations to RBI for

consideration, it is the banking regulator which would take the final call.

To ensure transparency, names of all the applicants would be put up on the RBI website.

The bank would have to be set up within a year of granting the in-principle approval. RBI

would reserve the right to withdraw the in-principle approval if there is any evidence of

self-dealing.

Cover Story

Banking Licenses - Entry with Riders

History

What prompted the RBI and government to consider issuing banking licenses to the private sector? The idea was first mooted in the 2010 -11 Budget Speech by Finance

Minister, which said that the objective was to expand the geographical coverage of banks and access to banking services.

In 1951, when India embarked on the process of planned development, there were 566 private commercial banks, many of which had their origins in industrial houses.

India's industrial houses have in the past run banks, or worked in close association with banks. These banks, however, concentrated their operations in urban areas and

largely catered to the upper sections of the society. No wonder then that RBI in its discussion paper on ‘Entry of New Banks in the Private Sector', has emphasized

promotion of financial inclusion as the objective for granting new licenses.

Detailed guidelines

Though most of the guidelines are on the expected lines, the big surprise was the decision to put broking outfits on the negative list along with real estate barons. RBI

believes that certain activities such as real estate and dealings in capital market, particularly broking activities, were riskier and represent a business model and culture

which are misaligned with a banking model. A number of non-banking finance companies — which have been salivating at the prospect of turning into full-fledged banks —

may find their chances of grabbing one of the licenses at stake scampered by this provision since they all have broking arms.

But that wasn’t the only surprise. The draft guidelines also said promoters or groups with diversified ownership would be eligible to promote banks. However, the

RBI did not explain what it meant by diversified ownership.

Assuming that the margin for FI business is currently zero and equal split in FI and

other business and a conservative 200 basis points margin for other business, the

overall margin for a new bank will be approximately 100/120 basis points. Hence,

business viability of such a model seems to be challenged, at least on papers!

Another seemingly uphill task is two-year compulsory listing clause for aspirants

(while listing is not mandatory for the existing players), along with minimum 12%

capital adequacy requirement for a bank in its first three years of operations against

9% CAR for existing banks. These obligations will drive up cost of funds, and thus cost

of lending.

Add operating costs and technology investments above obligations and end result is

higher time taken by banks to break even. Another aspect is the source and cost of

funds, the new banks will face multiple challenges in sourcing low-cost deposits

and will definitely have a higher cost of funds than the existing public sector and

private banks.

However, entire picture is not gloomy. The technology cost has come down sharply

and these new players will not have any legacy issues like existing banks.

Conclusion

The domestic banking system is dominated by 26 state-run lenders with a 75% share

of total assets, while 21 private banks account for about 20%-22% of assets and the

rest is split among 34 foreign banks. Still, about half of the total 1.2 bn population of

India has no access to banking services, while several corporate houses are keen to set

up banks. Intuitively, then providing them with banking license looks a logical solution.

With these big corporate already providing most of the banking services through their

NBFC subsidiary it may be easier for them to switch gear operationally, but meeting

the shareholding norms, financial inclusion responsibilities and other restrictions on

holding companies exposure may be a stumbling block.

But the real jolter is the provision that entitles the RBI to run a detailed

background check on the applicants with other regulators and enforcement and

investigative agencies such as the income tax department, the CBI or the

Enforcement Directorate. Several industrial houses and top-tier companies have

been sucked into controversial investigations into their commercial transactions,

deals and tax enquiries that have eventually landed in courts. This can become the

biggest litmus test that the banking license hopefuls will need to pass.

Bone of Contention

Industry has welcomed draft guidelines with a cheer, but, there are some

apprehensions associated with the emphasis on financial inclusion in the present

draft. Apparently, draft guidelines put new banks at disadvantageous position as

compared to private banks which got the license earlier, as new banks will have to

model their business so as to address financial inclusion. This will drive up the cost

for new banks, as branches in these regions will take longer to turn profitable.

Also, new banks would have to meet the priority sector targets and sub-targets

which will drive up the cost in the initial stage without supporting revenues. New

banks would also have to open at least one in four branches in rural areas with a

population of no more than 9,999.

This appears as a major bone of contention, given previous experience of Banks

with financial inclusion drive. Banks have been working towards FI for the last five

years or so. As on March 2011, a sample of 19 large andsmall sized domestic banks

had an average of Rs. 600 crorecredit outstanding for FI accounts.More

importantly, of the total FI accounts opened, only 40% were found to be active for

the last one year.Also, given the challenge that domestic banks would have had a

head-start on FI initiatives, reaching the next delta of FI customer would become

that much more difficult for the new banks.

LIC Housing Finance launches teaser home loan

scheme

Mortgage Company LIC Housing Finance joined the

teaser home loan bandwagon by introducing 'New

Advantage 5', under which the interest rate would

remain fixed for the first five years.New Advantage 5 is

offered at fixed interest rates for the first five years

and thereafter at floating rates, LIC Housing Finance

said in a statement. The floating rates will be linked to

the Prime Lending Rate prevailing at the time of the

switch, it said.

Car sales slowdown for second month running

Fewer buyers drove out of showrooms in new cars for

the second successive month in August, following the

central bank's serial intervention aimed at easing

demand in the economy to tame inflation. Production

cuts at two of the bigger carmakers, coupled with high

fuel prices, compounded the challenge for the auto

industry, dragging down car sales 10%, even as two-

wheelers posted a 16% growth.

Maharashtra ends zero cross-subsidy surcharge

regime

Maharashtra’s power sector will undergo a major shift,

as the state power regulator has ordered an end of the

zero cross-subsidy surcharge (CCS) regime introduced

in 2006 for open-access transactions.The Maharashtra

Electricity Regulatory Commission (MERC) said on

Friday that it had levied CCS ranging from Rs 0.21 per

unit to Rs 3.97 per unit for high-tension (HT) consumers

payable to MahaVitaran, Rs 0.26 per unit to Rs 2.79 per

unit payable to RInfra-D and Rs 2.58 per unit to Rs 2.81

per unit for TPC-D.The MahaVitaran had argued that

zero CSS would mean that the subsidized category of

consumers would have to share the burden of loss of

cross-subsidy whenever a consumer — otherwise

providing cross subsidy through tariff — shifts away

from it and opts for open access, which would not be in

the interest of the larger section of the consumers.

UGC lifts ban on Distance PhDs, MPhil courses

The University Grants Commission (UGC) has lifted the

two -year-old ban on distance MPhil and PhD courses.

The move comes after widespread protests by various

universities. Many Open Learning Universities like

IGNOU were protesting the ban on the ground that their

respective laws, passed by Parliament or legislatures,

allowed them to offer such courses.

CAG Report: RIL notified KGD6 discoveries without

details, Air India has accumulated debt of Rs

38,000 crore

Fresh trouble seems to be brewing for the UPA

government, as the Comptroller and Auditor General

(CAG) tabled two more high-profile audit reports that

could bring attention back to political corruption and

misdeeds at the highest levels.In its report on RIL's KGD6

contract, the CAG stated that the company notified

discoveries without details and declared entire contract

area as discovery area. RIL was found guilty of non-

relinquishment of area.

RBI clears Enam-Axis Bank deal

The Reserve Bank of India has approved Axis Bank’s

revised plan to acquire the broking and investment

banking businesses of Enam Securities. This ends nearly

10 months of uncertainty over the deal.The terms of the

earlier proposal were revised following the central bank’s

discomfort with the structure of the deal that entailed

Axis Bank offering shares to Enam, while the acquisition

was done by a subsidiary. While the details of the revised

structure were not known, the sources said it would

remain an all-stock deal.

Emerging Markets

Russia : Gazprom Opens Pipeline to Sakhalin

Prime Minister Vladimir Putin on 8th September opened

a multibillion-dollar pipeline that could potentially boost

natural gas exports from Russia to Asia, including through

reclusive North Korea.The Gazprom pipeline takes gas

from the Pacific island of Sakhalin to the mainland port

of Vladivostok. From there it could travel to Japan, China

and South Korea as the project develops. Initially, there

will only be enough gas for domestic needs, and it will

encourage new businesses to appear because energy

plants will dramatically increase the use of the fuel

and generate cheaper electricity, Putin said.

Indonesia: BI to oblige forex savings in local banks

Bank Indonesia (BI) is set to issue a new regulation later

this month obliging the savings of foreign exchange from

exports and foreign loans - either that of public or private

institutions - in domestic banks. It could help strengthen

Indonesia’s foreign currency liquidity, which has been

hitherto depending on “hot money”.As an impact of the

new regulation, domestic banks would need banking

products that could manage the funds.

Philippines: BSP keeps policy settings after prices

eased

THE BangkoSentralngPilipinas (BSP) has decided to hold

onto existing policy rates and reserve requirement ratio

amid benign inflationary pressures. In a briefing, BSP Gov.

AmandoTetangco Jr. said the policy-making Monetary

Board decided to keep the overnight borrowing and

lending rates at 4.50 percent and 6.50 percent, and the

reserve requirement ratio at 21 percent.

At the same time, inflation expectations would remain

firmly anchored given moderating commodity prices and

the recent string of stable inflation rates, the central bank

chief said.

Malaysia: July IPI down 0.6% on-yr as oil, gas

output shrink

Malaysia’s industrial production index (IPI) decline in July

2011, from a year ago and also from June, as oil and gas

production output shrank. The Statistics Department said

on Sept 9 the IPI in July eased 0.6% from a year ago. The

IPI in June was revised positive 1.3% year-on-year.

South Africa: Slower growth boosts case for

rate cut

South Africa’s economy grew at its slowest pace in

almost two years in the second quarter as the

manufacturing and mining sectors slumped after

strikes, boosting the case for interest rate cuts while

denting the government’s job-creation hopes.

The slowdown will make it even harder for the

legions of the country’s unemployed - more than a

million have lost their jobs since 2009 - to find work,

likely keeping the unemployment rate above 25%.

Brazil Outperformed by Other BRIC Nations

Brazil has been outperformed by the other three

BRIC countries, figures for the second quarter of

2011 have revealed. From the traditional BRIC

(Brazil, Russia, India, China) group of emerging

global economies, Brazil grew the least, following

poor results from the country’s industrial and

agricultural sectors. Although China and India

traditionally lead the group, Russia’s economy has

been buoyed by higher commodity prices in recent

months, due partly to higher oil prices, leaving Brazil

trailing in fourth place.

Sports in Dire Need of a Real “Game Changer”

In the aftermath of the recent anti-corruption surge, an important bill that is in

the works, the Sports Development Bill, is simply not getting the attention it

deserves. This bill has everything to do with corruption and the unholy nexus

between politics and big business. Interestingly this time around, the crusader

who is on a war-footing to fix sports administration in the country is Union

Minister of Sports, Ajay Maken. His opposition is the who-is-who of the

country’s business and political elite. SharadPawar sits atop the biggest money-

spinning sport in Indian history -- cricket. His party colleague, Praful Patel,

heads the football federation. The MCA is headed by VilasraoDeshmukh, while

the RCA is headed by Transport Minister, C.P. Joshi. The opposition parties are

equally represented in this racket. ArunJaitley of the BJP heads the DCA,

NarendraModi heads GCA, Farooq Abdullah heads the JKCA, LaluYadav heads

the BCA, then there is Manohar Joshi and Rajiv Shukla, among others, who play

dual roles as politicians and cricket administrators.

Next, all the business houses in the country have a piece of the cricketing action

--MukeshAmbani (Mumbai Indians), Vijay Mallya (Royal Challengers), Subrata

Roy (Pune Warriors), N. Srinivasan (Chennai Super Kings and BCCI President),

to name a few. Then, of course, you have the Bollywood stars who double as

team owners like PreityZinta (KXIP) and Shahrukh Khan (KKR), to name a few.

This is just a shortlist of the rich and powerful with strong ties to cricket.

If you dig deeper, every single sport in India has strong ties to politics and

business in some form or shape. There is absolutely nothing wrong with this

Open Forum

InFocus

Inflation Hurting Rich!

If inflation is hurting common man through high food and fuel costs, the

richie-rich club has its own inflation-related worries -- that is in prices of

Chanel bags and Rolex watches among other high-end lifestyle products.

The index, published for the first time, was calculated after taking into

account the price change of 20 lifestyle products and services widely used

by HNWIs over a one-year period ending April 2011. List included wine,

accessories, cigar and club membership in four major cities of Asia- Pacific

region -- Mumbai, Singapore, Shanghai and Hong Kong.

The study by the Swiss banking major Julius Baer found that the rise in

this Lifestyle Index is in fact much higher than the overall consumer price

inflation of 5.1 per cent for the region in the same period. Prices of high-

end lifestyle products have risen by 11.7 per cent in Asia-Pacific region,

including India, in the past one year.

All said and done, rich are definitely living an expensive life!

except for the fact that there is no transparency whatsoever in the running of

all these sports organizations. Thus, they serve as perfect breeding grounds for

corruption, nepotism, cronyism, and favoritism, among other ills. The BCCI, the

richest sports organization in the country, is run like a private club where

politicians and industrialists make their own rules and run their own show

with no kind of accountability or oversight whatsoever. The BCCI crushed the

ICL by launching the IPL and banning the ICL players. Was justice served?

What came of the IPL investigations? How exactly are national teams selected?

What policies and procedures does the BCCI follow when allotting TV rights?

For many years, the country’s cricketing business was JagmohanDalmiya’s

personal fiefdom. Now it’s the rule of the Pawarempire, while Dalmiya is

relegated to the cricketing kingdom in PaschimBanga. No matter who rules, the

BCCI gets to pick players to represent the country, enjoy extensive taxpayer

subsidies, discretely dole out handsome contracts to the likes of Gavaskar and

Shastri and insist that the media select them as commentators, etc., among

other outrageous acts.

Ajay Maken deserves utmost appreciation for taking on this powerful group in

one sweep with this bill. As expected, opponents of the bill complain about

“Government intervention”, “Government control”, “independence of sports”

etc. The bill proposes some much needed changes such as bringing these

sports bodies under RTI, having a Lokayuktha to investigate complaints in a

timely manner, and limiting the sports administrators, quotas for national

sportspersons in administration, and age limits for administrators, among

other changes. By defining someground rules, these changes aim to enforce

transparency and accountability and pave the way for professionalism in the

system, as opposed to a “Pawar-Raj” or a “Dalmiya-Raj”.

In a recent comment, Maken said, "Had this bill been enacted earlier, the

CWG scam would not have taken place. Had this bill been in place, most of

the accused in the CWG scam would not have been office-bearers in the

Indian Olympic Association. If we don't want such scams in the future, we

should enact this bill." This, in itself, should be a reason to treat this bill

seriously and give him all the support we possibly can.

In another interesting development, the infamous LalitModi, who fell out

with his buddies in the BCCI, now backs the BCCI in this struggle. Clearly,

Modi would rather battle the BCCI behind closed doors than face an open

and transparent investigation. This is yet another reason why this bill is

absolutely essential.

It is anybody’s guess as to how far Maken might be successful in making this

bill a reality. After the initial cabinet meeting, the draft of the bill was

rejected as expected. With no one of the likes of Team Anna to carry his

battle to the streets, a watered down bill, a change of ministries for Maken,

or a bill that languishes as parliamentary roadkill seems to be the likely

outcome.

This bill is another opportunity for the UPA to demonstrate its commitment

to reform and transparency. Rahul Gandhi arrived late for the anti-

corruption party, yet proclaimed himself to be the game changer. If there

was ever a need for a real game changer, it is now, in order to save the

sports bill.

I am reminded of my PT teacher in school, who might have said, “Hey! Game

changer, step forward, I say.”

Source: Economic Times

TeamChronicle

Bhavna Goal bhavna@investeurs.com

Akanksha Srivastva akanksha@investeurs.com

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