Biznews Aug 1 To Aug 10

BIZ VOCAB External Commercial Borrowings The borrowings raised by an Indian corporate from confirmed banking sources outside India are called External Commercial Borrowings (ECBs). ECBs are defined to include: • Commercial bank loans • Syndicated loans • Buyers' credit and suppliers' credit • Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc. • Credit from official export credit agencies • Commercial borrowings from the private sector window of Multilateral Financial Institutions such as IFC, ADB, AFIC, CDC, etc. ECBs are permitted by the Government of India as a source of finance for Indian corporates for expansion of existing capacity as well as for fresh investment. Benefits of ECBs ECBs have numerous benefits: • It provides the foreign currency funds that may not be available in India. • The cost of funds at times works out to be cheaper as compared to the cost of Rupee funds. • ECBs help in diversification of the investor base. • The international market is a better option in case of large requirements, as the availability of the funds is huge when compared to domestic market. • Corporates can raise ECBs from internationally recognised sources such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity holders, international capital markets etc.

NEWS Government announces policy for regional airlines Government announced a new policy for regional airlines aimed at improving connectivity between Tier II and Tier III cities. According to the policy, the regional airlines will operate primarily between airports of any of the four regions classified as north, south, west and east/north-east. The policy covers both aircraft and helicopter operators. The airports of one particular region will be designated by the Airports Authority of India. Impact •

All the new applicants seeking permission to start airlines are more likely to get the regional airline licence now.

Reason for the policy A ministry official said that the ministry is trying to avoid giving the licence for all-India operations now citing severe congestion at the metros. However, after a few years of operation as a regional airline, the carrier can apply for a second permit for pan-India operations. The licence, different from the one given to a scheduled operator having panIndia operations, would allow an airline in a particular region to operate from one metro (e.g. Delhi for the north region) to all the non-metros in the region. The licence holder will also be able to operate to other regions provided it does not operate into a metro.

JK Paper ties up with UN to sell carbon credit of farmers • •

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In first of its kind project in the country, paper manufacturer JK Paper tied up with the United Nations (UN) to sell carbon credits of farmers. Farmers in six districts of Andhra Pradesh and Orissa will recieve money in the form of carbon credit through the land use land use change in forestry (LULUCF) programme of the United Nations. The farmers in Orissa will plant eucalyptus trees in their lands. While the farmers of Andhra Pradesh will undertake plantation of cajurina in their unused and shallow lands.

Benefits of the policy •

Harsh Pati Singhania, Managing Director of JK Paper said that in the first phase, 2,800 farmers will participate in the project and plantation will be carried out over a total area of 3,500 hectares. He also added that since wood is the main raw

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material for their paper industry, the company itself would buy the plants after 5 7 years for an estimated cost of Rs 3.5 million. The estimated value of the carbon dioxide that will be absorbed by the plants during these years, will fetch them another Rs 0.4 million. The valuation is estimated in terms of carbon dioxide absorbed by the plants over a period of five to seven years. Farmers will be paid by the World Bank from its Bio Carbon Fund, specially set to deal with carbon trading. Vedamacs, a local NGO, will provide training to the farmers, while the cost will be borne by the JK Paper. Funds will be distributed to the farmers through an account jointly operated by the company and the NGO

ICICI, Dena bank cut deposit rates, loans get out of reach •

The interest rates on home loans, which were as low as 6.5 per cent just a year ago are now hovering at 11.25 per cent. Same for car loans, which were at 4.25 per cent a year back and now as high as 12.75 per cent.

Reason •

As expected after the RBI’s announcement of the new credit policy, banks are now cutting down deposit rates across the board. On Wednesday ICICI and Dena bank announced a cut in their deposit rates by 25-50 basis points.

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The impact of the CRR hike, coupled with finance minister P Chidambaram’s indication to banks on reduction of deposit rates, has resulted in a lot of public sector banks already announcing a cut in deposit rates.

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The latest move that has piled on to the interest burden is the restriction put on the ECBs (external commercial borrowings) by the government.

New ECB Norms •

In order to find a solution to the rising rupee crisis faced by the Indian industry, the government has decided to put restrictions on the external commercial borrowings, or ECBs.

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The new norms states that a company can raise up to USD 20 million dollars through the ECB route after getting RBI’s approval. But any ECB over USD 20 million can only be spent overseas. This move comes after India has seen unprecedented dollar inflows through ECBs. In the period from April-July, India has received ECBs to the tune of USD 9 billion.

Impact •

The move would reduce the flow of dollars into the country. The new norms states that a company can raise up to USD 20 million dollars through the ECB route after getting RBI’s approval. But any ECB over USD 20 million can only be spent overseas. This move comes after India has seen unprecedented dollar inflows through ECBs. In the period from April-July, India has received ECBs to the tune of USD 9 billion.

Who’s to benefit? •

BPO/ITES companies likely to benefit

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Export oriented companies expected to benefit

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Major beneficiaries are tech, banking companies

Who will be negatively impacted? •

Negative for oil marketing companies

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Manufacturing sector with capex to be impacted

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Hardcore manufacturing sector

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Capital Goods manufacturers

The BPO/ITES companies are likely to benefit. Export oriented companies are also expected to benefit. Since most of the IT companies have hedged at Rs. 40.50 per dollar, they may not feel any immediate impact of the Government’s move. On the other hand, Oil marketing companies will feel the brunt of the ECB norms, and will be hit negatively. The manufacturing sector with capex, will also be similarly impacted. This is because the Rupee depreciation may lead to companies booking losses.

US Federal Reserve keeps key interest rate unchanged •

The US economy has been witnessing a recent crisis that of a crash in its home loan market. Now all eyes were on the meeting of the central bank or the Federal Reserve.As expected there was no change in interest rates but there was growing pessimism about the US economy.

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The US Federal Reserve has left rates unchanged for the ninth consecutive time the rate hold was widely expected. But the fed statement indicated growing pessimism about the economy.

Impact •

The statement from the federal reserves indicated two new developments -concern about the tighter credit conditions - and increased risks to growth.

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The Federal decision sent Wall Street lower but stocks later recovered. At the close, the Standard & Poor’s 500 stock index was up 0.6 per cent, to 1,476.71, and the Dow Jones Industrial Average gained 0.3 per cent, to 13,504.30.The NASDAQ Composite index gained 0.6 per cent, to 2,561.60.

Walmart-Bharti ink deal to start operations in India •

Retail giant Wal-Mart Stores Inc has inked its entry into India. It has signed a deal with Sunil Mittal-promoted Bharti Enterprises that models their retail joint venture in the wholesale cash-and-carry business.

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"This venture (Bharti Wal Mart Private Ltd) is committed to bring the whole ecosystem together and the wholesale cash-and-carry business will cater not only to the organised retailers but also to small kirana stores, fruit and vegetable resellers, restaurants and other business owners," Bharti Enterprises Managing Director Rajan Mittal told PTI.

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The business model falls under the 100 per cent FDI route and does not need an approval from the Foreign Investment Promotion Board (FIPB).

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Officials say Wal-Mart already sources $600 million worth of products from India. And now 90 per cent of the products on offer in the Bharti-Wal-Mart stores will be sourced directly from domestic farmers.

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Bharti and Wal-Mart would hold equal stake in the joint venture, which would be business-to-business venture and would focus on setting up of supply chain and back-end logistics infrastructure.

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Bharti and Wal-Mart have signed two agreements pertaining to the joint venture and technology sharing and training of human resource. As per the agreement, Wal-Mart will provide technical support to Bharti Retail, the 100 per cent subsidiary of Bharti Enterprises, which will own and manage the retail stores.

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The new venture is expected to employ about 5,000 and sell a wide range of products, including fruits and vegetables, groceries and staples, footwear, clothing, consumer durables and other general merchandise items.

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The companies expect to open their first store towards the end of 2007.

Railways plan JV with RIL Reliance and Indian Railways may enter into a joint venture (JV) for a 22-km rail link between Panvel (Navi Mumbai ) and Rewas Port This JV will suffice the need of a rail connectivity to the 2,850-hectare port-based special economic zone (SEZ) at Rewas. Railways are keen to have Reliance as a majority stake holder in the JV. The construction of the rail link is estimated at Rs 2 billion. The railways already have similar JVs in Mundra, Paradip and Pipavav ports. Last year, Posco bought 10% stake in Paradip-Haridaspur rail link to the company`s upcoming SEZ in Orissa.

WORTH A READ Cash crunch and Sub-prime lending What is sub-prime lending? Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. Due to the increased risk associated with the takers, sub-prime loans are offered at a rate higher than market rates. These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates, bad credit history, and often, murky financial situations of the takers. The current sub-prime mortgage meltdown in US refers to the rash of sub-prime housing loan defaults that began in late 2006 and has continued into 2007. The sharp rise in foreclosures has caused several major sub-prime mortgage lenders to shut down or file for bankruptcy, leading to the collapse of stock prices for many in the subprime mortgage industry. About 21% of all mortgages between 2004 and 2006 were sub-prime, up from 9% during the previous eight years. By 2006, sub-prime mortgages totalled $600 billion, accounting for about 20% of US home loan market.

Impact on Indian Economy India is relatively less exposed to the aftermath of the US subprime mortgage collapse crisis. But it is nevertheless a wakeup call for a number of players who think that markets go only one way. Domestic companies may find it harder to access external commercial borrowings (ECB) though they may not be directly impacted if international investors unwind their equity holdings in listed companies. There could be some re-pricing of Indian assets as well. On the sentiment side, the whole episode may cast a shadow on an overall attitude towards credit and risk-taking. In the near term, the crisis would, in fact, help the Reserve Bank of India tackle the surging rupee. This, in turn, would give a breather to exporters whose rupee earnings have dropped over the last few months. But if the crisis does continue and causes a general economic down turn, India will not remain insulated. The biggest worry then would be of a slowdown in the economy. Few people realise that Indian growth has accompanied world growth. To that extent, if world growth is lower, it will affect India’s growth. Markets nowadays are so wellconnected that things never really remain fully isolated anymore Impact on the World Economy The US subprime mortgage crisis is attributed largely to defaults arising out of loans made to customers with low creditworthiness and history of defaults. Because these mortgages are traded in the markets, it has a spillover effect on banks, hedge funds and institutional investors who participate in it. Hedge funds, FIIs and other institutional investors, who have put money in mortgagebacked securities in the US, are usually invested in emerging markets as well. These funds offset the losses suffered due to the subprime loan crisis by divesting their portfolio in other markets. To that extent, these investors could suck out liquidity from emerging markets like India, making them vulnerable to the global turmoil.