After Disinvesting in PSUs – Govt. looks to sell land to ease fiscal pressures

The Centre is ready with an ambitious plan to sell surplus government land to generate cash to ease financial pressures, as suggested by the Vijay Kelkar committee on fiscal consolidation.

A Cabinet note prepared by the finance ministry within days of the Kelkar panel submitting its recommendations says that proceeds from the sale or lease of surplus land, seen as a non-performing asset, would be used only to repay loans or create capital assets that will generate recurring revenue. The upfront statement of objective is apparently a counter to any criticism that the government is selling family silver to feed its populist policy impulse.

The proposal virtually lays down the policy that outright sale of land is to be preferred over other modes of earning cash from it — like lease and licensing. The government says that land leases are a losing proposition since the rental is out of sync with market value. Also, regaining possession of land after expiry of lease is a tough act.

Any sale of land with market value of more than Rs 50 crore would require Cabinet approval while those below would have to be disposed as per laid-down e-auction procedure.

Railways can monetize 10K acres in cities

Crucially, for purposes of leasing, the Vijay Kelkar committee’s proposal has suggested that the rental be fixed on the basis of elaborate criteria based on market value of land and the expected appreciation.

The move to monetize land coincides with the raging debate over how to exploit government assets, including more divestment in PSUs to bridge the yawning fiscal deficit. The Kelkar committee warned that the failure to move briskly would expose the country to a crisis worse than what it had endured in 1991. The report suggested that exploitation of the government’s assets could play a key role.

Although most government departments do not have an exhaustive asset register, the assessment is that shipping, defence, posts, airport authority and railways would be sitting on the largest land banks. According to estimates, railways alone can monetize around 10,000 acres in urban centres, generating Rs 50,000 crore. Similarly, port trusts can monetize around one-fifth of 2.5 lakh acres they own.

The new land alienation policy may even cover Airport Authority of India and port trusts that enjoy statutory powers to grant lease on their own. Besides revenue for the cash-strapped exchequer, the move will result in the creation of a maiden database of government land and identification of surplus land with all public entities, PSUs included.

Sources said the finance ministry has moved quickly on the land issue as suggested by the Kelkar panel even though it took almost four weeks to dismiss the panel’s suggestion to do away with fuel, fertilizer and food subsidy and go slow on proposed food security law.

Officials pointed out that the move was a follow-up to the Ashok Chawla committee on allocation of natural resources that has been under discussion for months.

The draft policy lays out procedures for sale of land to cut out arbitrary actions that expose the government to charges of corruption like Cabinet nod for land assessed at over Rs 50 crore.

A Public Sector Land Management Committee comprising top secretaries will be tasked with creation of a database within a year. It would ensure that land records are updated and assess the market value based on floor area ratio, presence of utilities, the development potential and availability of minerals around the site. The government departments would also be asked to boost land’s market rate by value addition.

 

Source – Economictimes.com

European Banks no different than Indian Banks in taking Distress Portfolios to market

Europe has been synonymous with distress for a few years now–but the touted opportunity is there only for those who can wait, and wait some more, investors said Thursday at the Dow Jones Private Equity Analyst Conference in New York.

“There was a great amount of interest from our [limited partners] in Europe,” said Tripp Smith, senior managing director of GSO Capital Partners, the credit-focused affiliate of Blackstone Group. “It’s an easy distress story to tell. It should be a great opportunity… but there is caution right now.”

“LPs don’t want to rush in there with equity,” he said. “I don’t think it will be a huge, huge opportunity. It will play out slower [than expected] and over a few years.”

Speaking at a panel on distressed investing at the conference, Mr. Smith and other investors said the liquidity provided by the European Central Bank has helped prop up bank balance sheets at the cost of keeping private funds mostly on the sidelines.

European banks, which provide up to 90% of funding for businesses in Europe, still aren’t willing to take a hit on portfolios of distressed securities that are in the red.

Over time, though, that will change, said Mr. Smith, who is based in London.

“Banks would rather use the [ECB] liquidity to support those loans until they mature,” he said. “At that point in time, they don’t have a choice and we’ll see these portfolios [coming to the market].”

That will take a couple of more years, he said.

Distressed investors had been banking on major restructuring opportunities in Europe as budget crises in Greece, Ireland, Italy, Portugal and Spain revealed deep troubles in the banking system and the monetary union. Various U.S. private equity firms set up shop across the pond and were salivating for the inevitable shedding of distressed assets by the banks, as they had seen in the U.S. following Lehman Brothers Holdings Inc.’s collapse.

That didn’t come, at least not yet. Banks continue to dictate the terms of the asset disposal, and they are beginning from the highest quality, said Michael Duran, managing director of Millstein & Co.

European banks may work their way through their books to the lower quality assets where investors can buy “at value,” said Mr. Duran.

“Given the flow of assets…the lines may not intersect where we thought they would one or two years ago,” he said.

At times, banks ask for offers on assets without revealing the name of a business, just some of its financial numbers, and they may require investors to take some “rotten” assets with others where the investors see value, they said.

Access to data that would help distressed investors make a more informed decision is easier for equity investing than for debt investing, but those who jumped into equity positions in late 2010 when the opportunity seemed hot aren’t enjoying returns they thought they would, the panelists said.

Cabinet okays bailout for power distributors

The cost of power is all set to rise as the Cabinet approves a restructuring package for state electricity boards across the country.

One of the major riders for availing the restructuring package is that state electricity boards will have to revise the tariffs for consumers annually, and cut down on their transmission and distribution losses by 25 per cent.

Years of populism, corruption and mismanagement have driven the power distributors, most of them state-owned, deep into the red. They had accumulated Rs. 1.9 lakh crore in losses by the end of the 2010-11 financial year, according to government data.

The country’s mostly state-owned distribution utilities are drowning in losses and were blamed for triggering probably the worst blackout in history in July, when power was cut for two consecutive days in a massive area home to 67 crore people.

A lifeline for power distributors would free up cash and help them buy more power to supply factories and homes that resort to expensive diesel generators and solar panels to plug their energy gaps.

Under political pressure to sell below cost and losing more than a quarter of power supply to theft and decrepit networks, distribution companies have been borrowing for years to fund their losses. Just seven of the country’s 28 states—Rajasthan, Uttar Pradesh, Haryana, Tamil Nadu, Punjab, Madhya Pradesh and Andhra Pradesh—have between them accumulated short-term debt of Rs. 1.9 lakh crore from power distribution.

Last week, the government cut subsidies on diesel and opened up the country’s vast retail sector as well as aviation to foreign investment to win back investor confidence and attack the country’s ballooning fiscal deficit.

Prime Minister Manmohan Singh, defending the measures, said “money does not grow on trees” and that failure to bridge the gap between government spending and income would stoke inflation and lead to further loss of confidence in the economy.

Half measures
But analysts said the bailout plan did not address the country’s long-term energy problems and may only drag government lenders deeper into the red.

“The debt restructuring, as it stands, appears largely a breather as it is not accompanied by any concrete reform measures,” said Kameswara Rao, a partner at consultancy PricewaterhouseCoopers.

With loans to power distributors accounting for 4-7 per cent of their respective books, Indian Bank, Union Bank of India, Bank of India, Oriental Bank of Commerce and Canara Bank are among those with the highest exposures, according to a report by Bank of America-Merril Lynch.

The country’s largest lender, State Bank of India, and leading private banks have no exposure to the distributors, according to the report.

“The restructuring could worsen their (banks’) asset liability mismatch,” Rao warned. That is because banks will have to wait longer to be paid back, hampering their ability to repay short-term liabilities.

Source – Reuters

Rise & fall of Ispat Industries – on way to merger with JSW Steel

On September 1, JSW Steel announced that it was merging JSW Ispat Steel with itself. JSW Steel had originally bought a majority stake in Ispat Industries — a steel company started by industrialist M L Mittal — in 2010, after which it was renamed. This brings to a finale, the tortured history of arguably one of the finest steel makers in the country that ultimately hit rock-bottom and fell by the wayside.

Set up as Nippon Denro Ispat Ltd in 1984 by M L Mittal, the plant, according to JSW Steel Chairman and Managing Director Sajjan Jindal, is, till today, one of the most modern steel plants in the country.

According to the company, Ispat is the only steel maker in India and among a few in the world to have total flexibility in the choice of the steel making route, be it the conventional blast furnace route or the electric arc furnace one. Its dual technology allows Ispat the freedom to choose its raw material feed, be it pig iron, sponge iron, iron ore, scrap or any combination of various feeds. It also has total flexibility in choosing its energy source, be it electricity, coal or gas.
Incidentally, Nippon Denro was granted the first industrial licence by the government of India for manufacturing galvanised plain/corrugated sheets. This is also where L N Mittal, chairman of ArcelorMittal, started his journey towards becoming the steel tsar of the world.

M L Mittal began his own voyage in the steel sector in 1952 when he took over an ailing steel mill in Calcutta, now Kolkata. He made it profitable and later sold it off. In 1974,

M L set his sights on Indonesia and the Ispat Group came into being. L N Mittal was dispatched to the country to handle this company, called PT Ispat Indo.

In 1994, L N Mittal broke away from the family and charted his own course with Ispat International. The control of Ispat Industries was held by his father and two brothers, Pramod and Vinod. In the same year, Ispat Industries set up its DRI sponge iron plant of 1.6 million tonne. This was the world’s largest and most efficient plant.

But, this efficiency proved largely irrelevant in the face of the financial losses incurred, and with practically no control over raw material supplies, the company ran itself into the ground. Ironically, L N at the time was buying steel mills all over the world and turning them around with blazing speed, unmatched by anyone else. Things back home, at Ispat, were only getting worse, with a global steel recession in full sway.

It’s not as if Ispat didn’t try to become a contender. It continued to add capacities with a hot strip mill in 1995 and conarc process to make steel in 1998 — the first of its kind in Asia — followed by a two million-tonne blast furnace to make steel in 2003. But, Ispat could never get back on its feet. Over the years, Ispat’s steel capacity stood at three million tonne, when companies like JSW Steel surpassed it.

The slowdown around the early part of the 2000s forced Ispat Industries, like Essar Steel and JSW Steel, into a debt restructuring programme to save the company. The other two successfully turned around and are leading steel makers today, with Essar having a global presence and a steelmaking capacity of 14 million tonne. JSW Steel also revived itself, increased its capacity to 11 million tonne and bought Ispat in 2010.

The recent, complete acquisition of Ispat Industries was not a straight affair for Jindal. His brother Naveen, of Jindal Steel and Power, was interested in the company, but the moment he came to know that JSW was also keen on it, he stepped back. JSW Steel hammered out the details of the acquisition in eight days.

ISPAT’S JOURNEY
1952: M L Mittal, founder chairman of the Ispat Group, begins his foray into the iron and steel business with the takeover of an ailing rolling mill in Calcutta

1953: Mittal acquires the necessary licence and takes over TOR Steel

1974: M L Mittal sets up PT Ispat Indo in Indonesia.

1980: This decade witnesses a series of acquisitions around the world and hectic expansion in India

1984: Nippon Denro Ispat Limited is incorporated and granted the first industrial license by government of India for manufacturing galvanised plain/corrugated sheets

1985: Nippon Denro Ispat Limited, now known as Ispat Industries Ltd (IIL)

1988: IIL sets up a highly advanced cold-rolling reversing mill, in collaboration with Hitachi of Japan, to manufacture a wide range of cold-rolled carbon steel strips

1988: IIL installs a colour coating line – the first of its kind in India – for the manufacture of pre-painted colour steel sheets

1994: Business interests within the Ispat Group are demarcated. The eldest son, L N Mittal continues to manage the international operations while Pramod and Vinod, the younger brothers, focus on steel and other businesses in India

1994: IIL commissions the world’s largest gas-based single mega module plant for manufacturing direct reduced iron (sponge iron), at its Dolvi, Maharashtra-based plant

1995: A 1.5-mtpa hot strip mill with continuous strip processing (CSP) technology is installed at Dolvi

2003: A 2-million tonne blast furnace is commissioned. Sponge iron capacity increased from 1.2 mtpa to 1.4 mtpa

2010: Losses are in excess of Rs 2,500 crore. Two corporate debt restructuring packages later, lenders push for a change in management

2010: Merger with JSW Steel. On 21 December, it is declared that JSW Steel will buy controlling interest in Ispat Industries at an enterprise value of $3 billion to emerge as India’s largest producer of the commodity with an annual capacity of 14.3 million tonnes. The company is now called JSW Ispat Steel Ltd
Meanwhile, In 2006, Mittal Steel successfully bought Arcelor and a new company, ArcelorMittal, was formed, controlling 10 per cent of the total steel production in the world.

Ispat continued to post losses, which in 2010, were in excess of Rs 2,500 crore. Two corporate debt restructuring packages later, it was finally time for lenders to push the button and force a change in management.

After JSW bought the majority 41 per cent stake in Ispat Industries, the Mittal brothers were left with 19.26 per cent in the company. Vinod Mittal continued to be the chairman to ensure a smooth transition to JSW Steel. With the merger ball finally rolling, the brothers will be left with around three per cent stake in JSW Steel and no representation on its board.

That will be the end of the road for Mittals and their association with Ispat. With the merger, JSW Steel is now looking at setting up 40 million-tonne-per-year steel capacity by 2020.

Source – Business Standard

Distress Sale of Air India’s Art Collection

Whether Air India decides to sell its art or not, the publicity surrounding it has turned the focus on a historically important and little seen collection. Family jewels are meant to be sold in times of need. So it’s only natural that the beleaguered Air India, saddled with a debt of Rs 43,777 crore and accumulated losses of Rs 27,700 crore in the last five years, should be thinking of “monetising” its large collection of art. To this end, a committee comprising Sarayu Doshi, former director of National Gallery of Modern Art, Mumbai; Tasneem Mehta, art historian and vice-chairman of INTACH, Mumbai; and Anjali Sen, former director of NGMA, New Delhi, has been appointed with the mandate to advise, classify, catalogue and evaluate the works. The committee will submit its report in two months’ time and only then will a final call be taken on whether to sell, says GP Rao, Air India’s spokesperson. But Union Civil Aviations Minister Ajit Singh already has a ballpark estimate of Rs 350 crore for the collection, which is somewhat incredible given that the entire Indian art market today is valued at between Rs 1,000-Rs 1,200 crore. This means that Air India will not find it easy to sell the works at one go, as Kishore Singh, Delhi Art Gallery’s head of publications and exhibitions, points out, since that would have a disastrous impact on prices.

Be that as it may, one good thing has already come of all the publicity — it has turned the spotlight on one of independent India’s most important art collections, a collection that has never been displayed and whose range and depth few people know of. Of course, the art-works have not exactly been under wraps — these are spread all over the landmark Air India Building at Nariman Point in Mumbai, and in the airlines’ offices abroad. Over the years, some of these have also been showcased in calendars, posters, covers of in-flight menu cards, timetables, exclusive giveaways and other publicity material.
In 2008, on the occasion of its 75th year, Air India published a coffee-table book on its collection. While tantalisingly sketchy on details — there’s very little information, for instance, on when the collection began, how and who put it together, and what principles, if any, guided the acquisition of objects — The Air India Art Collection has plenty of images, which gives a fair idea of its nature and importance.

The Air India Art Collection is an eclectic and patchy assortment of five different sets of artifacts — contemporary art; antique art objects; specimens of traditional Indian handlooms, apparel and some jewellery; 19th century studio photographs and old clocks.

* * * * *

The first category, which has attracted the most attention, includes paintings and sculptures of artists working in Mumbai between the 1950s and 1970s, which is when most of the art-works were acquired. The Progressive Artists’ Group, among the most coveted of Indian artists at auctions today, is well represented by MF Husain (18 paintings), KH Ara, SH Raza and VS Gaitonde. Besides, there are several canvases by NS Bendre, KK Hebbar, Badri Narayan, Laxman Pai, Shanti Dave, SG Vasudev, GR Santosh, Manu Parekh, Ghulam Mohammed Sheikh, Anjolie Ela Menon and Arpana Caur — all artists who have since made their mark and become famous. Among the younger, contemporary set there’s an early canvas by Jitish Kallat. There are sculptures as well by the likes of Piloo Pochkhanawala, Raghav Kaneria and B Vithal, artists who are important for creating a modern idiom and using industrial material such as scrap iron.

Art writer Ratnottama Sengupta, who saw a large portion of the collection when she was writing her essay on the modern Indian art section in the book, says “most of the works have value because of the history .[In the 1950s and 60s] Air India was a big collector, and a big hope for artists…at a time when the concept of art as an investment did not exist.”

The second category, that of antiques, is a mixed bag of bronze and stone sculptures, elaborately carved wood panels, miniature paintings, Thanjavur glass paintings, pichvais and kalamkari prints — the highlights being a 9th-century stone figure of Vishnu, with figures of Brahma and Vishnu on the halo surrounding his head, and another 11th-century door jamb depicting the river goddess Ganga on her crocodile mount. (To give an approximate estimate of the international prices of such objects, the September 12 Christie’s auction of Indian art has a 9th/10th century door relief in red sandstone with a price range of $10,000-$15,000 [Rs 5.6 lakh and Rs 8.4 lakh]).

The collection of textiles is rather indifferent, containing representative weaves of different parts of India — the Assamese mekhala, a double ikkat Patola wedding sari, Kanchipuram brocades and Baluchari silks, a few specimens of zari and gold kasab embroidery, and some pearl and silver ornaments. The old photographs are all portraits of Indian princes by the Lala Deen Dayal studio.

The surprise element, however, is the assortment of mantle clocks in exquisitely decorated cases made of oakwood, brass or marble, embellished with fine inlay work, gilded brass or glass etchings. Dating back to the late 19th-early 20th century, these were made in Europe by specialist clockmakers such as Winterhalder and Hofmeier, James McCabe and Savory & Sons and are much coveted collectibles today. Jitendra Bhargava, Air India’s former executive director, remembers these clocks occupying pride of place in the directors’ offices and “an old man, who would come to wind them up every day”.

* * * * *

Brand-building seems to have been the primary reason why Air India collected art. As V Thulasidas, then chairman & Managing Director, Air India, wrote in his preface to The Air India Art Collection: “Inspired by the wealth of our cultural heritage, it was decided to build up prestige and goodwill internationally by creating a truly national character for the airline [….] works of art added to the ethnic interiors of our booking offices, some of which were visible through large glass windows to attract pedestrians passing by.”

But who was it at Air India with the discerning eye for art and the instincts of a Magpie? According to Thulasidas, it was Jal B. Cowasji, Air India’s publicity officer at the time, and S.K. (Bobby) Kooka, its first commercial director (who also created the maharajah logo for Air India in 1946). “Cowasji…an avid lover of art, visited art galleries and art studios, and purchased works…Artists were also commissioned to paint murals on the walls of our international booking offices.”

Eminent senior artist Shanti Dave, for instance, made several large murals for Air India in the ’50s and ’60s. “The first was at the Taj Mahal hotel in Bombay where Air India had a reservation counter, after which I was asked to do one at the airline’s Janpath office. Later, I did murals for Air India’s offices on 5th Avenue, New York, Los Angeles, Rome, Sydney and Perth.” Dave’s mural at the VIP lounge of New York’s [JFK] Kennedy airport, depicting the village in Gujarat where he was born, was featured on the front page of The New York Timesin 1964.

Husain, too, has spoken of Cowasji in a conversation with art-historian Yadhodhara Dalmia published in Journeys: Four Generations of Indian Artists in Their Own Words: “Jal used to buy B. Prabha and [Rasik] Raval was the most fashionable painter in those days with all the Parsis, so much so that we started calling it the Air India school.”

Baroda-based senior artist Ghulam Mohammed Sheikh remembers Cowasji as a “stocky”, “friendly” figure who was extremely familiar with art and artists and a regular at exhibitions. Incidentally, Air India was Sheikh’s first buyer. “Cowasji picked up an oil painting from my first solo show in 1960 at Bombay’s Jehangir Art Gallery,” Sheikh reminisces, paying “not more than Rs 400-Rs 500”.

But Air India did not always have to buy. “Often, a work of art was added to the collection in lieu of an air ticket to the artists because, during this period, art did not really have any commercial value,” writes Thulasidas. Husain bears this out in his reminiscences to Dalmia: “They would take the paintings and give free air tickets in return. As a result, the artists could travel to Czechoslovakia, Hong Kong, Paris. I did about four or five trips.”

Some of the spirit of those times is captured in The TIFR Art Collection (2010), an elaborate account by Mortimer Chatterjee and Tara Lal of how another institution was building a large collection of modern Indian art around the same time — Tata Institute of Fundamental Research, under Homi Bhabha. There was “camaraderie and competition” in art collecting between TIFR and Air India, write the authors, with representatives of both institutions checking out exhibitions and galleries. The book refers to a note by K S Chandrasekharan, a mathematician at TIFR, to Bhabha after the former went to see an exhibition of Adi Davierwalla’s sculptures: “I saw Davierwala’s (sic) show. He said Air India wanted the Thunderbird. He was waiting for your [i.e., Bhabha’s] word.”

Of course, in later years, the TIFR and Air India collections have gone divergent ways — while few have seen the latter, Bhabha’s labour of love was recognised by a large exhibition and The TIFR Art Collection, a significant publication that gives interesting details of when and how the works were bought, how their purchase was funded (Bhabha got Jawaharlal Nehru to saction 1 per cent of the funds for art acquisitions) — sets it in the context of the times.

Air India’s precarious finances might rule out this option. What might, however, be open to it is what is happening to the collection of the other Bhabha, Homi’s brother Jamshed, whose estate, comprising paintings, sculptures, china, glassware, silver, etc is being auctioned by Pundoles’ auction house, to benefit the National Centre for Performing Arts, an institution that the latter founded.

But will that be enough to save Air India?

Source – Business Standard

49% FDI in civil aviation allowed; industry welcomes

Foreign airlines can now pick up 49 percent stake in India’s domestic carriers, a step that is expected to give a boost to cash-strapped aviation industry.

The Cabinet Committee on Economic Affairs on Friday approved the proposal which would pave way for much-needed equity infusion into India’s airlines passing through acute turbulence as most of them are in dire need of funds for operations.

“The cabinet today approved the proposal of allowing foreign airlines to pick upto 49 per cent stakes in Indian carrier. Though FDI of upto 49 percent, 75 percent and 100 per cent was there in aviation sector, foreign airlines were not allowed,” Civil Aviation Minister Ajit Singh told reporters after the meeting.

Current FDI norms allow foreign investors, not related to airline business, to directly or indirectly own an equity stake of up to 49 percent in Indian carrier.

Allowing foreign airlines to pick up stakes in Indian carriers has been a long-pending demand of the aviation sector.

Most of the Indian carriers are suffering losses because of high taxes on jet fuel, rising airport fees, costlier loans, poor infrastructure and cut-throat competition.

Except IndiGo, all airlines have posted losses in the financial year ending on March 31.

Kingfisher Airlines, which is burdened with a debt of over Rs 7,000 crore, has been in the forefront of pushing for permission to allow foreign airlines to invest in domestic carriers.

Though Kingfisher has been pushing for FDI to boost the sector, Jet Airways and IndiGo have expressed reservations saying allowing global players in would lead to cartelisation and takeovers of Indian carriers.

The opening of the sector to foreign airlines may, however, bring good news for passengers who would benefit from more competitive fares, better product and services and better international connectivity.
The Manmohan Singh government had initiated the process in January but key UPA constituent Trinamool Congress was opposed to it.

Sensing that FDI proposals may be approved by the government, Kalanidhi Maran owned no-frill carrier – Spice Jet, had recently held “preliminary discussions” with a Gulf-based airline for potential investment in the budget carrier. Foreign carriers such as British Airways and Virgin Atlantic Airways Ltd have expressed interest in investing in Indian carriers.

Multi-brand retail: Cabinet OK’s 51% FDI

After battling stiff opposition, government today allowed 51 per cent foreign investment in multi-brand retail but left it to the states to permit global retailers open stores.
It has also tweaked the sourcing norms for FDI exceeding 50 per cent in single brand retail, requiring foreign firms, which want a relaxation of the 30 per cent procurement norms, to set up manufacturing facilities in the country.

After considering various aspects and discussions with various stakeholders and states, it has been decided to go ahead with the decision to allow 51 per cent FDI in multi-brand retail, Commerce and Industry Minister Anand Sharma told reporters after the Cabinet meeting chaired by Prime Minister Manmohan Singh.

“The response has been a mixed one but the UPA had tried to evolve a consensus,” he said.

The cabinet had in November last year approved 51 per cent FDI in multi-brand retail but had to put it on hold due to opposition from political parties, including UPA ally Trinamool Congress.
Sharma also reiterated that foreign retailers planning to enter the multi-brand segment would have to invest a minimum of USD 100 million with 50 per cent of it in rural areas.

The Minister said the firms will also have to source 30 per cent of their products from Micro and Small & Medium Enterprises where FDI is 51 per cent and above.

Under the norms, 50 per cent of total investment will have to be invested in ‘backend infrastructure’ within three years of the induction of FDI.

“As far as the urban areas are concerned, they will be allowed to open stores only in cities with a population of more than one million, while in the case of hilly states, it will be up to the respective state governments,” Sharma added.

For single brand, the Cabinet decided that any firm seeking waiver of the mandatory 30 per cent local sourcing norms would have to set up a manufacturing facility in the country, the minister added.
This will help, in particular, foreign watch makers and textile manufacturers who want to enter India on their own, he added.

Swedish retailer IKEA, which planned to invest Rs 10,500 crore in India, had sought relaxations in clauses related to the 30 per cent sourcing norms from small and medium units.

In November last year the government approved 51 per cent FDI in multi-brand but was put on hold.

The notification for implementation of the decision is expected by the end of this month.

The decision paves way for global retail giants WalMart, Carrefour and Tesco to open retail stores in India under their own brands.

At present WalMart has a 50:50 cash and carry joint venture with Bharti Group, while Carrefour runs wholesale stores. Tesco, on the other hand has a tie-up with the Tata group and supports the Indian firm in the running of Star Bazaar chain of retail outlets.
Welcoming the development, Future Group founder and CEO Kishore Biyani said: “FDI in multi brand retail is a welcome step. It will help in creation of more job. People will realise it is a win-win for all”.

Expressing similar views, Bharti Enterprises Vice Chairman and Managing Director Rajan Bharti Mittal said: “This is a landmark decision in India’s economic reforms process.

Development of organised retail in India will bring immense benefits to stakeholders across the value chain – from farmers to small manufacturers and above all to consumer”.

Ernst & Young Partner Paresh Parekh said the move is one of the boldest steps and both global and domestic retailers will be going back to drawing boards to explore joint ventures.

Indian banks face Basel III challenge

India’s struggling banking sector will face a period of lower profitability as it seeks to raise at least Rs5,000bn ($90bn) in extra capital to meet the new Basel III international banking standards, the head of the nation’s central bank has warned.

Duvvuri Subbarao, governor of the Reserve Bank of India, also suggested that prime minister Manmohan Singh’s government could consider reducing its majority stakes in a variety of state-owned banks, as it attempts to cut the Rs900bn ($16bn) in recapitalisation needed to maintain present shareholding levels.

The warning comes at a time of rising concerns over the health of India’s banking system, and the state-backed institutions that make up over three-quarters of lending in particular, given sharp recent rises in non-performing and restructured assets against a backdrop of slowing economic growth.

“Implementation of Basel III is expected to result in a decline in Indian banks’ Roe [return on equity] in the short term,” Governor Subbarao said, speaking at a banking conference in Mumbai, while stressing that the reforms would benefit India’s overall financial system in the longer term.

The global Basel III requirements, which require all banks to hold top quality capital equal to 7 per cent of their assets, adjusted for risk, are aimed at improving financial stability and avoiding a repeat of the crisis of 2008. But the sharply higher capital requirements have drawn warnings from analysts and financiers about their impact on banking lending rates and wider economic growth across the developing world.

Governor Subbarao said the new norms, which will be phased in between 2013 and 2019, would also increase the cost of capital for banks, while placing a particular strain on government finances, given India’s widening fiscal deficit.

“Clearly, providing equity capital of this size in the face of fiscal constraints poses significant challenges,” he said, suggesting that Mr Singh’s administration could save Rs200bn ($3.4bn) in recapitalisation costs if it reduced its stakes in all state-owned banks to just 51 per cent.

India’s government has so far rejected suggestions that it might reduce its shareholding in more than two dozen public sector banks, including a stake of approximately 60 per cent in the State Bank of India, the nation’s largest lender by market share.

Facing a declining national saving rate and wary equity markets, however, analysts questioned whether policy makers or banking leaders would be able to raise the level of funds indicated by Governor Subbarao’s remarks without selling larger stakes, potentially to foreign investors.

“To my mind this is the single most vexing challenge for the government and the banking industry in India, because I don’t think they have a clue where these funds will come from over the next decade,” says Ravi Trivedy, an independent banking analyst and former executive director at KPMG India.

In addition to fresh infusions from government, India’s state-backed banks will need to raise at least $20bn from equity markets to meet the Basel requirements, creating the risk of a capital shortfall in coming years, according to Fitch, the rating agency.

“With its back to the wall and few other sources of capital available, the government may not have a choice but to lower its stake in these banks,” Mr Trivedy says, “and this could well mean allowing foreign investors to buy a strategic stake.”

A taskforce of leading bankers warned in June that the Basel III rules were too focused on problems that occurred in Europe and the US. They argued the standards unfairly penalise trade finance and project finance, two forms of credit that are particularly important in developing nations.

But Governor Subbarao said India, which is a member of the global standard setting body, needed to conform to the rules. “The ‘perception’ of a lower standard regulatory regime will put Indian banks at a disadvantage in global competition,” he said.

 

Source – vccircle.com

India July industrial output (IIP) Flat

India’s industrial production barely grew in July, with the anaemic pace of expansion suggesting broader economic activity remains weak and offering little relief to embattled Prime Minister Manmohan Singh’s as state elections loom. The data, released by the Central Statistics Office (CSO) on Wednesday, showed output at factories, mines and utilities grew an annual 0.1 percent, helped by a recovery in consumer non-durables. That was slightly lower than a forecast of 0.3 percent growth in a poll, but an improvement nonetheless on an annual contraction of 1.8 percent logged in June. Wednesday’s data also provided an insight into the economy’s performance in the quarter to end-September. The economy has grown 5.5 percent or less in the last two quarters, a far cry from the 7-8 percent growth seen in the preceding period. But inflationary worries mean the central bank has resisted lowering interest rates despite the sharp slowdown. The Reserve Bank of India is widely expected to leave its key lending rates steady when it reviews its monetary policy on Monday, in sharp contrast to many other G20 central banks that have been easing conditions to support growth.

 

The data highlights structural weaknesses of the economy, with poor domestic demand amid political gridlock and contracting exports, said Dariusz Kowalczyk, senior strategist at Credit Agricole CIB in Hong Kong.

It may lead to renewed expectations of a rate cut this month, although we believe that the odds still favour the RBI to stay put.

Indian markets showed little reaction after the data. India’s 10-year benchmark bond yield fell around 1 basis point to 8.18 percent from levels before the data, trading flat from its previous close.

The rupee held on to its earlier gains after the output data, trading at 55.24/25 versus its 55.34/35 close on Tuesday, while India’s benchmark BSE stock index also retained its gains, trading up 0.5 percent.

 

SLOWDOWN STARTING TO BITE

The latest economic report offers little respite for Prime Minister Singh as he struggles to escape the aftermath of corruption scandals that have undermined his authority to push ahead with bold and politically unpalatable economic reforms.

I don’t think the Reserve Bank of India would change its stance going by today’s factory output reading, said Rupa Rege Nitsure, chief economist at Bank Of Baroda In Mumbai.

India’s problems are primarily structural and require structural solutions.

Underlining the challenges facing the government, HSBC on Wednesday downgraded Indian stocks to underweight from neutral, citing the government’s lack of progress in fiscal or structural reform as one factor in its decision.

With the economic slowdown beginning to bite India’s middle class, Singh faces the uphill task of reviving the economy before his government faces the polls in a series of state elections starting this year and leading up to a general election in 2014.

 

Manufacturing, which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP, contracted 0.2 percent in July from a year earlier compared with a contraction of 3.1 percent a month ago.

The sector is battling weak demand in both overseas and domestic markets. Annual merchandise exports have fallen in four of the last five months, while domestic car sales posted their first annual decline in 10 months in August.

With the manufacturing Purchasing Managers’ Index (PMI) easing to a nine-month low in August, the outlook for the sector does not look promising.

Capital investment in the economy grew a meagre 0.7 percent in the second quarter of 2012 from a year earlier. Capital goods output, a key investment indicator, shrank an annual 5 percent in July. It has grown only once in the past 11 months.

 

Source – Financial Express