Oil India declares 340 percent dividend

Source:ED:27 May 2010, 1335 hrs IST,AGENCIES



NEW DELHI: The state-owned Oil India Limited (OIL) declared a dividend of 340 percent in its fourth quarter results on Wednesday.

N M Borah, Chairman and Managing Director of OIL announced that the declared dividend is one of the highest declared by the company so far.

"In recognition to the company's excellent performance, the board has declared that the total dividend this year around will be 340 percent, which is the highest dividend declared so far by the company. Out of this, 180 percent was already given as the interim dividend and we are declaring another 160 percent, making that 340 percent, which, as I said, has been the highest so far in the history of our company," said Borah.

The dividend payout of 340 percent was declared after the net profit rose 20.76 percent in the fiscal yearend of March, on account of a production increase, a rise in the realization price and forex earnings.

"The net profit of the company has jumped up and reached a number of Rs 2,610 crores, which implies the growth of 20.76 percent," Borah said.

O. I. L. produced 3.572 million tons of crude oil in 2009/10. There has been a growth rate of three percent in crude oil production and 6.5 percent in natural gas.

Visa, Monitise tie-up to offer financial services on mobile

Source : FC: Dipak Mondal May 26 2010 , New Delhi

Global retail electronic payments network Visa and mobile financial services provider Monitise on Wednesday announced the formation of a joint venture that will provide a technology platform for financial institutions and cellular operators in India to offer a range of mobile financial services to consumers.


The new company will combine Visa’s expertise in enabling secure, globally interoperable financial transactions with Monitise’s knowhow in developing mobile financial technology for a broad range of handsets.


The joint venture builds on an existing partnership between Visa and Monitise and will give financial service providers a platform to accelerate the delivery of mobile financial services such as banking, bill payments, mass transit ticketing, mobile top-up and others.


India is world’s second largest mobile market with an estimated 584 million mobile phone subscribers as of March 31.


“Creating this joint venture is a crucial step that can help expand the acceptance of digital currency in India and enable the migration of $700 billion of annual consumer spending from cash to electronic forms of payments,” said Elizabeth Buse, group executive, international, Visa.


She said Visa and Monitise together can provide banks and mobile network operators in India the scale, security and reliability required to make mobile money a reality for consumers.


Monitise chief executive officer Alastair Lukies said: “This exciting extension of our successful partnership with Visa will enable providers of financial services to have a single, secure and convenient link to offer a wide range of services via a mobile device. India’s mobile market offers tremendous growth opportunities for this joint venture and for our customers.”


The joint venture transaction will be undertaken in accordance with applicable laws and is expected to close in June.


Both shareholders will be contributing resources to the joint venture and an outstanding local team of experts in their fields is being put together.

Unit-linked plans: More lip service

Source:Neha Pandey & Shilpy Sinha / Mumbai May 27, 2010, 0:43 IST

The proposal to cap surrender charges may ensure buyers get back some — just some — of their investment.

Last week, the Insurance Regulatory and Development Authority (Irda) put up draft proposals fixing surrender charges for unit-linked insurance plans (Ulips) and the revival period for lapsed polices on its website.


Irda proposed that surrender charges be capped. For policies of less than 10 years, the charges might be capped at 2.5-12.5 per cent of the fund value in the first five years. For policies with tenures of more than 10 years, the charges could be fixed at 2.5-15 per cent of the fund value for the first six years. After the fifth (for policies of less than 10 years) and sixth (for more than 10 years) years, the charges would be zero.

On the face of it, the charges look nominal. But, the operative word here is ‘fund value’. This is to be arrived at after deducting all the costs. According to the draft guidelines, “The surrender value of the policy is the amount remaining in the fund account less applicable surrender charges which is refundable to the policyholder.” That is, surrender value is equal to fund value minus surrender charges.

HIGH COSTS, LOW RETURNS PREMIUMS: Rs 1 lakh per year; Policy: 10 year RATE OF RETURN: 10 per cent per annum
Year	Total cost* (Rs)	Fund value (Rs)	Surrender charge (%)	Amount received (Rs)#
1	60,000	44,000	12.5	38,500
2	15,000	141,900	10.0	127,710
3	15,000	249,590	7.5	230,870
4	10,000	373,549	5.0	354,871
5	10,000	509,904	2.5	497,156
*Total fund value at year-end, including returns #Withdrawal at year-end

Here’s the catch. Given that Ulips front-load their policies in the first few years, the fund value itself will be low. For instance, there are charges under various heads like premium allocation and policy administration. The costs can be as high as 60-100 per cent in the first year itself.

As a result, even if the guidelines come into effect, buyers of these policies will not get much of their money. Rahul Aggarwal, chief executive officer of Optima Insurance Brokers, said, “The entire premium will be initially used for various costs applied on the policyholder. Therefore, there will be no premium left for any surrender charge to be levied in the initial years.”

Let’s understand this with an example. Let’s say the first year’s premium that you have paid is Rs 1 lakh for a policy of less than 10 years. Assuming the first year charges at 60 per cent of the premium (Rs 60,000), the fund value of the policy is Rs 40,000. Also, returns are being assumed at 10 per cent a year.

Even at this rate of return, the buyer of the Ulip is unlikely to get back even his principal of Rs 5 lakh if he exits the policy in the fifth year (see High costs, Low returns). In fact, if the investor exits at the end of the first year, he may get only Rs 38,500.

If he does so before the end of the first year, the number could be much less.

As far as returns go, though it has been assumed that the policy is earning 10 per cent a year, it will depend on market conditions. In a bad year, you may not get anything. “With policies with high front-end costs, you stand to get back nothing from the capital invested,” said Suresh Sadagopan, a certified financial planner.

“Things could improve slightly. 

Most insurers deduct all the remaining amount (Rs 40,000 in the first year, in this case) if the investor withdraws in the first year, to recover costs,” said an executive of a top life insurance company, who did not wish to be named.

The good part: The amount will be completely tax-free, because the product will be treated as an insurance plan by the income tax department. In case of a pension plan, both capital invested and returns are taxable if the policy is surrendered in the interim.

Insurers said since Ulips were long-term products, withdrawals or surrender charges should not worry policyholders. G V Nageswara Rao, MD and CEO, IDBI Fortis, said, “With recent regulatory changes, Ulips have become more attractive. These are best suited for the long term.”

Banks meet on cards for base rate consensus

Source :BS Reporter / Mumbai May 27, 2010, 0:21 IST

The guessing game by banks on each other’s base rate is expected to be over soon when country’s top bankers meet – at the behest of State Bank of India (SBI) – to discuss the new loan pricing mechanism.

The meeting would precede SBI’s base rate announcement on June 15, a fortnight before its roll out, SBI Chairman O P Bhatt said today.
   

Most banks are yet to decide about their base rate and the parameters to be taken into account for calculating the new benchmark. A key parameter is the cost of funds, which can cause a huge variance across banks. For example, if a bank takes overnight cost of funds, which is very low, its base rate will also be significantly lower from a bank, which, for example, takes one-year average cost of funds into account.

As a result, most banks are eagerly awaiting the move by the country’s largest lender, SBI. This meeting assumes significance, as bankers will get to know what their colleagues in other banks are contemplating and help put in place an industry-wide consensus.

Last year, the Reserve Bank of India (RBI) had constituted a committee under Executive Director Deepak Mohanty to review the present system of benchmark prime lending rate. The move was aimed at bringing about greater transparency in risk pricing. The regulator issued the final guidelines in April, but the decision about mechanism was left completely in the hands of banks.

Bhatt said SBI would have three more internal meetings to finally decide on the number. He, however, hinted that the bank’s base rate could be around 8 per cent. The bank will announce its base rate a fortnight before the scheduled roll out, so that its staff gets familiar with the model and the calculation.

Meanwhile, the country’s second-largest state-run lender, Punjab National Bank, today said its base rate might be around 8-8.5 per cent.

Apple overtakes Microsoft as biggest tech company

Source : BS:Reuters / Seattle May 27, 2010, 11:01 IST Apple Inc shot past Microsoft Corp as the world's biggest tech company based on market value on Wednesday, the latest milestone in the resurgence of the maker of the iPhone, which nearly went out of business in the 1990s. Apple's shares rose as much 2.8 per cent on Nasdaq on Wednesday, as Microsoft shares floundered, briefly pushing its market value above $229 billion, ahead of its longtime rival. Both stocks ended down after a late-day sell-off, but Apple emerged ahead with a market value of about $222 billion, compared with Microsoft's $219 billion, according to Reuters data. Apple shares closed down 0.4 per cent at $244.11 on Nasdaq, while Microsoft fell 4 per cent to a seven-month low of $25.01. Shares of Apple are worth more than 10 times what they were 10 years ago, as it has profited from revolutionizing consumer electronics with its stylish, easy to use products such as the iPod, iPhone and MacBook laptops. The last time Apple had a higher market value than Microsoft was Dec. 19, 1989, according to Thomson Reuters Datastream. Microsoft, whose operating system runs on more than 90 per cent of the world's personal computers, has not been able to match growth rates from its hey-day 1990s. Its stock is down 20 percent from 10 years ago. Apple, which struggled for many years to get its products into the mainstream, resorted to a $150 million investment from the much larger Microsoft in 1997 in order to keep it afloat. At that time, Microsoft's market value was more than five times that of Apple. Microsoft still leads Apple in sales. In the latest quarter, Microsoft reported $14.5 billion in revenue compared with Apple's $13.5 billion. Cupertino, California-based Apple is now the second-largest company on the Standard & Poor's 500 index by market value, behind energy behemoth Exxon Mobil Corp.

Telecom companies raise Rs 36,000 crore for 3G licence payments

Source:27 May 2010, 0036 hrs IST,Joji Thomas Philip,ET Bureau


NEW DELHI: Only seven days after India’s marathon 3G auctions ended, the licence winners have mopped up Rs 36,000 crore in loans of the total Rs 67,719 crore they will have to pay up by the month-end. In return, the seven winners will get airwaves that will enable them to offer services such as video calling and high-speed internet on mobile phones.

An analysis by ET reveals that telcos have also lined up an additional Rs 29,000 crore from their cash reserves and a further Rs 11,000 crore in internal accruals to pay for these airwaves.

A third of the Rs 36,000 crore loans that have been raised by telcos are through the issue of commercial papers (i.e. short-term note issued with a maturity period of one year or less), ET’s analysis reveal. Banking executives say that mutual funds have been the largest investors in these securities issued by telcos over the last couple of days. Commercial papers are usually not listed on exchanges, but are traded over-the-counter and foreign institutional investors are also allowed to invest in these securities

Put simply, the ability of all auction-weary mobile firms already battling a savage price war, to line up funds, erases fears of defaults as witnessed in Europe earlier this decade when mobile firms that had overbid for radio frequencies were unable to meet their commitments.

The country’s top two mobile firms-Bharti Airtel and Reliance Communications (RCOM)-each won 13 of the 22 telecom zones on offer while other major operators Aircel Cellular, Vodafone Essar, Idea Cellular and Tata won a total of 13, 9, 11 and 9 circles, respectively.

Among the seven winners, Bharti Airtel, India’s largest telco will have to shell out the maximum — it must pay Rs 12,300 crore for these airwaves in 13 circles. Bharti has raised Rs 8,500 crore from a consortium of financial institutions, including State Bank of India and HDFC Bank which has agreed to part finance the payment, two executives with direct knowledge of the development told ET. Bharti Airtel’s loan is estimated to spread over six years at an interest of 8-9%. The company did not comment its 3G funding plans, but industry executives aware of Bharti’s strategy say that it will use its cash reserves, which were at Rs 7,700 crore as of March 2010, to pay out the remaining amount for both third generation and broadband wireless spectrum.

Vodafone Essar, the country’s second-largest private operator in terms of revenues, will pay for 3G airwaves from its Rs 10,000 crore loan from SBI. Banking executives said this five-year loan carries an interest rate of less then 10% for the first two years; and thereafter, it will be re-adjusted on the basis of the average prime lending rate of four public sector banks SBI, Punjab National Bank, Canara Bank and Bank of Baroda. Vodafone Essar is securing additional funding by issuing commercial papers and has also got another loan from a consortium of banks, an executive close to the company said without divulging details.

Reliance Communications has so far raised Rs 4,000 crore from selling commercial papers at 6%, of which, LIC has picked up Rs 2,000 crore, while the remaining has been subscribed to by MFs and banks. Executives close to the company said that it was on the verge of finalising an additional Rs 4,500 crore funding to pay for 3G airwaves within the next 48 hours.



Idea Cellular too has figured out its funding for 3G airwaves. Executives with the telco said that over 40% (Rs 2,400 crore) of Rs 5,769 crore that have to paid for 3G airwaves will be through internal accruals. It is learnt that this will largely come from the leftover funds from sale of stake in subsidiary Aditya Birla Telecom to private equity player Providence last year. Idea Cellular has also raised Rs 500 crore in commercial paper, and the remaining amount would be through a mix of long- and short-term loans from a consortium of banks led by IDBI.

“Bharti’s net debt-equity ratio will stand at an estimated 1.35 including the debt taken for the Zain acquisition. Idea’s net debt-equity ratio will rise to 1.03 after the payment of the 3G bid and RCOM’s net debt-equity ratio will rise to 0.73. We continue to believe that Bharti’s financial position remains robust, despite an elevated level of leverage due to its strong cash flows,” Deutsche Bank analysts Srinivas Rao and Amyn Pirami said in a note.

Aircel Cellular, which has to shell out Rs 6,500 crore for 3G airwaves has raised Rs 4,000 crore by issuing commercial papers at 6% interest for a one-year period from Deutsche Bank, Standard Chartered, HSBC and Barclays, an executive with direct knowledge of the development said. This executive also added that the telco had further raised a 12-month bridge loan of about Rs 2,000 crore from HSBC, PNB and Axis Bank. Besides, the company may also use the proceeds from its recent sale of its tower arm, which fetched Rs 8,500 crore, to part fund the licence fee for 3G and broadband spectrums.

Tata Teleservice has so far raised close to Rs 5,000 crore to pay for 3G airwaves, the breakup of which is as follows: LIC has subscribed to 10-year bonds floated by telco for Rs 1,000 crore. It has issued commercial paper for Rs 1,000 crore at 6% with a tenure of one year to various institutions. Tata Teleservices has also secured a five-year Rs 1,500 crore loan from a clutch of banks led by Central Bank of India.

It has further raised Rs 1,100 crore from public financial institutions such as IDBI and Kotak Yearly. Interest rates for all of these range from 7.33 % to 8.3% , its spokesperson said. In addition to this, the telco also has about Rs 6,000 crore reserves in its books from its stake sale to NTT DoCoMo last year and from internal accruals, the company spokesperson added. Tata Teleservices must pay just under Rs 6,000 crore for the 3G airwaves.

S Tel, which won 3G airwaves in all the three circles it currently operates must pay Rs 338 crore for these frequencies, and its CEO Shamik Das told ET that the operator had already secured a ‘Rs 350 crore loan from IDBI at an interest rate of less then 10%’. “This is a bridge loan that will later be converted to a long term loan,” Mr Das added.

State-owned telco BSNL, which has to pay Rs 10,187 crore for 3G airwaves, will fund the entire amount from its cash reserves of Rs 35,000 crore, while MTNL will pay a significant part of its 6,653 crore for these airwaves from its cash reserves which stands at about Rs 5,000 crore, executives at both PSUs said.

Interview :‘India is an attractive investment destination'

Ms Suzanne Smith, Standard & Poor's

Source :Priya Nair,BL;Mumbai, May 26,2010

The high economic growth makes India an attractive destination for foreign capital as compared to its peers.
However, its high fiscal deficit and the time taken to get permits weighs against it, says Ms Suzanne Smith, Managing Director, Corporate and Government Ratings, South & Southeast Asia, Standard & Poor's.
But the increasing foreign direct investment into the country speaks of the faith that investors have in the Indian story, she says in an interview with Business Line. Although the economic growth looks fragile in other countries and regions of the world, India is not likely to suffer any major contagion in the current year, she
said.

Excepts from the interview:

How does India compare with its peers as an investment destination?
Foreign investors look at many factors including labour laws, the legal system, corporate governance, ability to attain permits and so on.
As an investment destination, India compares favourably on growth. But one area where it compares unfavourably is the time it takes to obtain approvals, and the lengthy process for resolving disputes through the legal system. It is cumbersome for getting permissions to start business as compared to some of its neighbouring countries. But despite all this, foreign direct investment is increasing rapidly, which is good as it is a more stable source of funding than portfolio capital flows.

Is the overheating of the Indian economy a pressing concern?
India and Asia seem to be moving at a different pace than Europe and the US. Broadly speaking, credit quality is not deteriorating. Overheating is not a pressing concern. The more pressing issue is the fragility of the global economic recovery and performance of specific asset classes. The general trend is fragile, but things are looking alright in 2010-11 for India.
But heavier scrutiny is on portfolio flows. The capital markets are reactively negative over concerns regarding the deteriorating credit quality of the Government of Greece.
Though the economy could falter, we don't see any major contagion. For the corporate sector, it has not caused any downgrades. However, the current volatility in the capital markets suggests that borrowing costs for all entities, including Indian banks and corporates could increase as credit spreads widen across the board.

What are the challenges with regard to India's sovereign ratings? How does India compare to its peer countries?
India's sovereign rating is currently an investment grade rating. On the Standard & Poor scale it's a ‘BBB-' and has been at that level for the last several years. In addition to ratings, we also assign outlooks to ratings. The outlook addresses the most likely direction that we think the rating will take over the next 12-18 months. The outlook currently on the Indian sovereign ratings is ‘stable'. For some time, in 2009, it had been ‘negative' primarily because of the increase in the amount of fiscal spending the Government had announced, which was a reversal of a trend of declining fiscal deficits. That was one of the more important things causing the concern. But the outlook was revised in March this y ear from ‘negative' to ‘stable'. The primary reason is that the direction the Government is heading in terms of fiscal consolidation or steps to reduce the fiscal deficit back to levels it was previously at or even lower, in the medium term, seem to be put in place and in our view, are credible.
In terms of comparing Indian sovereign ratings to other peers the magnitude of the deficit is still a major issue. But there are a lot of positive things. The level of macro-economic growth that is occurring in India compared to other parts of the world is a positive factor for the rating.
The rating factors in different credit issues in terms of politics, the economic structure of the country and many more criteria.


Why is the rating on India: country-region ‘BBB-'despite its good economic growth, while the US, which is grappling with low growth, high deficit, is rated ‘AAA'?
As mentioned, macroeconomic growth is one of many credit factors that drive the sovereign ratings. Although the United States is currently growing at a much lower rate than India and lower than it has grown in the past, the US still has a long history of sustained economic growth which has contributed to it being the largest economy in the world. Another important credit factors supporting the AAA rating is the use of the US dollar worldwide as a reserve currency. Although India is managing its currency well, it has very different issues with regard to exchange rate management than the US. The third factor underpinning the USA would be the flexibility that the US has basically in terms of diversity of its economy, the strength of its workforce and its population, its history of innovating and getting out of problems in the past and its stable government. Those are other credit factors underpinning the ‘AAA' rating.
The outlook for the US sovereign rating is stable. This doesn't mean that it will never change, but is not expected to change in the near term. Clearly, the US is facing unprecedented pressures on the fiscal front. It has medium to long-term problems demographically, with regard to an aging population which has fiscal implications in healthcare costs, and other entitlements, pensions.

How is the credit scenario situation looking? Are there any particular companies or sectors that you are watching closely?
Credit is an issue for some sectors. For instance, the shipping sector still has issues. The automotive sector has issues globally, but in India the automotive sector is looking well.
Bharti Airtel is on credit watch with a ‘negative' outlook because of the debt funding following its acquiring of Zain Telecom. It is a significantly large debt-funded acquisition. The company is moving from a lightly leveraged company to a highly leveraged company.
We are also watching some steel companies closely because of what is going on in Europe. None of the banks are on ‘negative' watch.

RBI offers additional liquidity support to banks

Source : BLBureau:Mumbai, May 26,2010.

In a bid to help tide over the liquidity crunch arising from advance tax payments and 3G auctions, the Reserve Bank of India on Wednesday said banks can avail additional liquidity support under the Liquidity Adjustment Facility (LAF) to the extent of up to 0.5 per cent of their net demand and time liabilities.

For any shortfall in the maintenance of Statutory Liquidity Ratio arising out of availment of the additional liquidity facility, banks could seek waiver of penal interest purely as an ad hoc, temporary measure, the RBI said in a statement.
 
Further, the second LAF (SLAF) will be conducted on a daily basis up to July 2. It will be conducted between 4.00 p.m. and 4.30 p.m.

The RBI said these measures were ad hoc in nature and the additional liquidity support under this scheme and the daily SLAF would be available with effect from May 28, 2010 and up to July 2, 2010.

Liquidity in the banking system has been under pressure from May 21 onwards, when under the LAF, the three-day reverse repo window saw reduced deployment of Rs 9,325 crore as against Rs 34,915 crore on May 20. Subsequently, the LAF amount fell to Rs 5,685 crore on May 26.

Cabinet nod to fast-track Govt stake sale in PSUs

 

Source :BL Bureau:May27,2010

New Delhi, May 26 The Cabinet Committee on Economic Affairs (CCEA) today gave its nod for a vital change in the process of share sale in state-run firms. Merchant banker appointments for Government stake sale will now be advanced to an earlier stage in the disinvestment process, thereby saving time, which could be optimally utilised in preparing for the actual transaction.

"The appointment of merchant bankers and other intermediaries will now be taken up simultaneously with the process of seeking CCEA approval as soon as the Minister-incharge has approved the case," said an official release issued here after the CCEA meeting. The approved process will help planning and timing of the public offerings in a manner that they are spread out evenly.

This would also avoid bunching as far as possible so as to ensure better response from investors, including retail. RETAIL INTEREST Retail investors' have shown muted interest in the recent Government stake sale transactions, partly due to some stiff pricing. There was lacklustre retail response to NTPC, REC and NMDC issues last fiscal. The Department of Disinvestment has however maintained that the transactions have not been stiffly priced for the retail investors and that something was left on the table for such investors.

The Government's disinvestment strategy has undergone many shifts and turns over the last two decades. The UPA Government has now made it mandatory for all profitable listed public sector entities to have minimum 10 per cent public shareholding. Also, all profitable public sector companies need to be listed. For 2010-11, the Government has set a disinvestment target of Rs 40,000 crore.

The Centre's disinvestment mop up so far in the current fiscal stood at Rs 1,080 crore. In 2009-10, the disinvestment receipts stood at Rs 23,550 crore. Merchant Banking community has been showing keen interest in getting mandates for divestment transactions, with some of them even offering to take up assignments without charging any fees.

The department of disinvestment has also recently modified the criteria for appointment of merchant bankers for Government stake sale, with more weightage being given on technical parameters. There has been only one divestment transaction so far in the current fiscal - Satluj Jal Vidyut Nigam Ltd. There are indications that the Engineers India Ltd (EIL) divestment transaction could be the next. The CCEA had in January this year given its nod for divestment of 10 per cent Government stake in EIL through a follow-on-offering in the domestic market. krsrivats@thehindu.co.in

The Ambani chutzpah

 

Source : BL :S. Murlidharan: May 27,2010

The promoters of the undivided Reliance group have always been known for their savoir faire, often bordering on chutzpah. Not for them the conventional, weather-beaten path. Innovation and out-of-the-box thinking have characterised their functioning, to the extent that the competition has always been found wanting.

Their relentless pursuit of targets has many a time invited flak. The government of the day at the Centre in the 1980s came in for sharp criticism when it played ball with Reliance in allowing the impossible — conversion of non-convertible debentures into shares. The move not only was heretical but resulted in conserving cash for the company.

To Reliance's credit, however, even its diehard critics concede that it always rewards its three-million-strong shareholders handsomely.

Naturally, the market, far from taking umbrage to the daring financial innovation, gave its thumbs up. Its popularity with investors has always been very high, so much so that it could afford to bypass financial institutions for borrowings.

A votary of disintermediation, Reliance got all the funds it needed through borrowings from the public. It also pioneered the idea of keeping new units off its balance-sheet, only to merge them with it once teething troubles were over. It has two large refineries with capacities of 27 million tonnes each.

SPLIT AND TEMPORARY TRUCE

The demise of its founder, Dhirubhai Ambani, in 2004 led to his two sons parting ways and charting their own future. The upshot was the division of spoils, resulting in two mini empires being carved out of the undivided family conglomerate, with the flagship company Reliance Industries Ltd (RIL) going to the elder son, Mukesh. Younger brother Anil got a mélange of products and services that denied him the advantages of core competence and a share in the exciting business of oil.

The truce, earlier brokered by their mother, was founded on a few delusions:

The family agreement would have the effect of binding their respective companies;

The non-compete agreement, a corollary to, and a sub-set of, the family settlement is sacrosanct and fool-proof; and

Disentangling of cross-holdings in the companies appropriated by the brothers amounted to demerger.

PATCH-UP THAT FAILED

It was apparent that the truce was fragile. To take the last point first, demerger can happen only when a product or service division is spun off into a separate company, which admittedly was not the case inasmuch as the energy and telecom divisions, for example, were not arms of RIL but standalone companies.

It is amazing that everyone including the regulators could have been taken in by the claim that disentangling of cross-holding amounted to demerger.

Of course, the grand delusion paid off in the form of tax benefits intended for corporatisation of the divisions.

The Supreme Court disabused the first aspect of the agreement recently when it held that a family agreement cannot be made binding on the companies controlled by the parties to the agreement unless ratified by the companies concerned.

It now appears that the family settlement was crafted more with heart than with mind as if to make post-haste amends for shutting out the younger sibling from the oil scene, and instead guaranteeing the companies under his stable a concessional price for gas from RIL.

The second assumption that non-compete agreements are sacrosanct and foolproof had surprised many who knew that such agreements often were complied more in breach. Entrepreneurs get around the restrictions by setting up layers of investment companies.

It is just as well that wisdom has dawned on the Ambani brothers, who have agreed to smoke the peace pipe and scrap the non-compete agreements, except for gas-based power production.

BENEFITS OF UNITY

Dhirubhai Ambani must be smiling wherever he is at the latest turn of events. They herald the possibility of the estranged brothers coming together again and in the process merging the companies belonging to them under the banner of RIL, which would catapult it further up in the Fortune 500 list.

Even if they remain standalone companies but amenable to control by a family investment vehicle, as in the case of the Tatas and Birlas —Tata Sons Ltd and Pilani Investment respectively — it would serve the purpose of consolidation.

(The author is a Delhi-based chartered accountant.)

GM India may pull plug on Spark EV

 

Source :BLBureau:New Delhi, May 26,2010

General Motors (GM) India may not continue its tie-up with Reva Electric Car Company (RECC) with Mahindra & Mahindra taking a controlling stake in the latter company.
The US-based automaker has, however, said that it would not abandon its electric vehicle (EV) plans for India.
“We may not continue the Spark EV programme with Reva in the light of this development and will pursue our own electric vehicle programme. An announcement to this effect will be issued soon,” said Mr P. Balendran, Vice-President, Corporate Affairs, GM India.
GM had singed an agreement with Reva in September 2009 to develop EVs using Reva's electric power train technology and GM's car platforms. GM had earlier said that the first car under the venture — the electric Spark — would be launched by October 2010.
Mr Balendran had recently said that the electric Spark project with Reva is being delayed due to issues in battery sourcing, which is pushing up the costs.
Speaking to Business Line, Mr Chetan Maini, Deputy Chairman and Chief Technology Officer, RECC said, “We've just been informed by GM that they would like to pursue other options. We have had an excellent relationship with GM on this project. Reva had been working on a licensing agreement where the power train was our own, so we don't expect any legal issues to be involved.”
roudra.b@thehindu.co.in

Asset reconstruction cos seek hike in FDI limit

 

source: BL :Mumbai, May 26,2010

Asset reconstruction companies have moved the Government and the Reserve Bank of India to up the foreign direct investment limit in their equity capital as also the foreign institutional investment limit in each tranche of security receipts (SRs) issued by the companies from 49 per cent to 74 per cent.

Speaking to reporters on the sidelines of a FICCI seminar, Mr M.S. Verma, Chairman, International Asset Reconstruction Company Ltd, reasoned that when foreign investment up to 74 per cent was allowed in systemically important private sector banks, there was no reason why foreign investment in ARCs and the SRs issued by them should be capped at 49 per cent.

The need for upping the foreign investment limit in ARCs has arisen as raising funds from the domestic markets to buy non-performing assets from banks is proving to be a constraint as ARCs are perceived as high-risk enterprises.

According to Mr P.H. Ravikumar, Managing Director and Chief Executive Officer, Invent Assets Securitisation & Reconstruction Pvt Ltd, specialised international funds, which have an appetite for investing in non-performing assets, could easily fill the funding gap if the foreign investment limit is raised.

As the situation obtains now, the maximum foreign equity should not exceed 49 per cent of the paid-up equity capital of an ARC.

Further, foreign institutional investors registered with the Securities and Exchange Board of India can invest only up to 49 per cent of each tranche of scheme of security receipts subject to the condition that investment of a single FII in each tranche of scheme of SRs does not exceed 10 per cent of the issue.

To help ARCs get over capital constraints, it is understood that the RBI is considering raising the FII investment limit in SRs issued by ARCs to 74 per cent. Further, the single FII investment limit in each tranche of scheme of SRs is likely to be raised to 24 per cent from 10 cent now.

Mr M.R. Umarji, Chief Legal Adviser, Indian Banks' Association, said the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act could be suitably amended to raise the FDI limit in ARCs to 74 per cent while the RBI could suitably amend the guidelines on FII investment in SRs issued by ARCs.

ARCs are formed to acquire non-performing loans (NPLs) from banks and financial institutions with the objective of focused management and optimal recovery, thereby, relieving banks and financial institutions of the burden of NPL and allowing them to focus on core activities. Banks are left with cleaner balance sheets and do not have to deal with problem clients.

Mahindra buys 55% stake in electric car co Reva

(From left) Mr Chetan Maini, Chief of Technology and Strategy, of Mahindra REVA; Dr Pawan Goenka, President (Automotive and Farm Equipmnet Sector) Mahindra and Mahindra; Mr Sandeep Maini, Director, Mahindra-REVA; at a press conference in Bangalore on Wednesday. – G. R N Somashekar

source :BLBureau:Bangalore, May 26,2010

Country's largest utility vehicle maker Mahindra & Mahindra on Wednesday said it has bought a majority, 55.2 per cent, stake in Maini Group's Reva Electric Car Company as it expects alternative technology to drive a large part of global vehicle growth in the future.

But post this development, Reva's tie-up with General Motors to produce Spark electric vehicles has turned shaky. General Motors had earlier said that it will launch its electric car in association with Reva towards the end of this year.

But an official with Reva said that the company will have no problems if GM continues the association.

New beginnings

Announcing the new joint venture with Reva to presspersons, Mr Pawan Goenka, President of Automotive and Farm Equipment sector, Mahindra & Mahindra, the foray into electric vehicles may not lead to immediate benefits or profits but the company is betting big on hybrid as well as electric technology.

Mr Goenka said M&M will own 55.2 per cent in the joint venture, which has been named Mahindra Reva Electric Vehicle Company, through a combination of equity purchase from the promoters and a fresh equity infusion of over Rs 45 crore into the new company. He did not disclose the amount of money paid to buy the stake in Reva.

The board has also been reconstituted with Mr Goenka as the chairman of the new company.

The board will have five directors from Mahindra & Mahindra, two from the Maini Group, one from the US-based AEV, an existing equity partner, and one independent director.

Reva's history

Before the acquisition of stake by Mahindra & Mahindra, the Maini Group bought over stakes from two private equity funds, Global Environment Fund as well as Draper Fisher Jurvetson in Reva increasing its stake in the company to over 80 per cent from about 30 per cent. After the acquisition of the stake by M&M, the Maini Group has a 31 per cent stake in the company while AEV has 11 per cent and the rest is with the employees.

Both the PE Funds invested a total of about $20 million in the company in 2006.

The authorised capital of the new company is Rs 135 crore and the paid-up capital Rs 20 crore.

Future plans

Explaining the reason behind Reva's decision to sell its stake to Mahindra & Mahindra, Mr Chetan Maini (who founded Reva), its chief of technology and strategy, said the EV market was poised to grow significantly and “we concluded that in order to seize the opportunity, we needed the resources and experience of a major automotive manufacturer.”

Mr Goenka said that with this acquisition, M&M will get a lead of three-four years in the electric vehicle space. He said the company expects to sell about 50,000 electric vehicles from the Reva stable in about seven years.

Before the new joint venture, Reva sold a total of about 3,500 cars since 2001. Mr Goenka said Reva's technology will be used for the manufacture of its three-wheeler Bijlee vehicle as well as its mini-truck Maxximo.

An analyst with Angel Broking, Ms Vaishali Jajoo, said that the acquisition of the stake in Reva was part of a long-term strategy for M&M to become a global player, as vehicle manufacturers in the US as well as in the UK are readying to launch more hybrid as well as electric cars.