Biznews Aug 19 To Aug 25

.

BIZ VOCAB

WEEKLY ECONOMIC INDICATORS

Global Depository Receipts A Global Depository Receipt (GDR) is a certificate issued by a Depository Bank which represents the ownership of an underlying number of shares. They are traded and settled independently of the underlying share, and are commonly used to invest in companies in developing or emerging markets. They trade on the International Order Book (IOB) of the London Stock Exchange (LSE), In India, the proceeds of the GDRs can be used for financing capital goods imports, capital expenditure including domestic purchase/installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier external borrowings, and equity investment in joint ventures etc.

ECONOMIC INDICATORS

RUPEE/ USD RUPEE/ € SENSEX NIFTY GOLD/10 gm SILVER/kg OIL($)

WEEK ENDING 24TH AUGUST 41.09 55.97 14425 4190 8910 16490 71.13

WEEKLY CHANGE

-0.63 0.36 2.01 1.99 1.36 -2.68 0.02

EWS S IPPETS Subprime Woes Hit India and Japan Most Concerns over a crisis in the US sub prime lending market (where loans are offered to borrowers who do not qualify for market interest rates due to poor credit history) had sent global markets into a tailspin since the mid week of July.India’s Sensex and Japan’s Nikkie have shed 10.13% and 12.4% respectively over the past one month while the American Dow Jones Industrial Average Index has fallen only 5.49% Impact: 1. The sharp rise in sub prime credit defaults has caused several major sub prime mortgage lenders to shut down or file for bankruptcy. This leads to a general market downtrend and negative sentiment and has caused fear-led sell off from foreign institutions. 2. In China there is a minimum lock in period for staying invested in a market. So Foreign Institutional Investors (FII”s) aren’t allowed to pull out their money. Japan has fallen more on account of Yen instabilities. 3. But there are also arguments that the global investment environment may actually favour markets like India. Investors will be looking for strong growth stories that are independent of the US economy, and India fits the bill perfectly. We are in the midst of a huge domestic cycle, driven by infrastructure, and this is complemented by a strong domestic consumption story driven by demographics, income distribution and retail finance. 4. Exports as a percentage of GDP are the lowest in India among all Asian countries and we as an economy are much less exposed to the US consumer than most in Asia. The larger Indian companies have limited borrowing on their balance sheets and are not overly reliant on foreign capital for growth. Indian companies also tend to have much better-articulated growth strategies. 5. The whole emerging markets asset class will have a few choppy months as the full extent of deleveraging and quest for liquidity plays out. India will be as badly affected as any of the other large emerging markets, in this indiscriminate bout of risk reduction. However, at the end of this in the new market environment, which will emerge, India should actually be a beneficiary.

Holcim Acquires Stake in Ambuja Cement Holcim, the second largest cement maker in the world is consolidating it’s position in Ambuja Cements Ltd. Holcim which previously held around 32.35 per cent in Ambuja Cements through Holderind Investments and Ambuja Cements India Pvt Ltd , had acquired another 3.94 per cent in Ambuja Cements from its founder promoters at a price of Rs 154 per share. Having exceeded the acquisition limit of 5 per cent in a fiscal set by Sebi’s takeover norms Holcim is supposed to make an open offer to mop up another 20 per cent stake

and if the offer is accepted in full, Holcim’s stake in Ambuja Cements will rise to more than 56 per cent. The open offer, if fully subscribed, will involve a payout of up to $1.2 billion. Impact: 1. The above deal will bipolarise the Indian Cement Sector with Holcim-Ambuja combine on one side and Grasim-Ultratech combine on the other. 2. This open offer shows that Holcim is confident about the future prospects of Cement Industry in India and that the international players have a bullish outlook on cement. 3. There is going to be more consolidation and more pricing power in the hands of producers. And, that will benefit all the companies going forward. In the coming couple of years, with incremental demand in cement expected to be higher than incremental supply – thanks to the booming real estate market and construction boom in India and in Middle East- the latter generating more export facilities, most of the Indian players are ramping up capacity to bridge this gap. Clearly, cement is set to be a preferred flavour for the markets in the coming days.

ICICI Bank Overcomes FIPB Hurdle to Holding Company The Foreign Investment Promotion Board (FIPB) has cleared a proposal from CICI bank to float a wholly owned subsidiary called ICICI Financial services which will own its investments in the insurance and mutual funds business. The bank has also received the board’s approval for selling up to 24% in ICICI financial services to foreign investors. ICICI bank had already received the go –ahead from the Insurance And Regulatory Authority (IRDA). However, both these approvals are subject to a final clearance from the RBI. Once fully approved, ICICI bank will first sell a 5.9% stake in its holding company to foreign investors to help fund the organic growth of its subsidiaries. Goldman Sachs will be the largest foreign investor in the holding company. Impact: 1. If the holding company structure is approved by the RBI, it could set a precedent for other banks looking to adopt this model to fund their subsidiaries. 2. SBI has also proposed to set up a subsidiary for all its non-banking arms, including is insurance ventures.

Gokaldas Sold Out to Blackstone Blackstone Group, one of the world’s largest buyout firms, has accelerated its investments in India with a free non-compete agreement - picking up a 50.1% stake in Gokaldas Exports Ltd, the country’s largest garments exporter, for $116 million or Rs482.5 crore, and setting aside another $49 million for an open tender mandated under local securities laws for an additional 20% of the target’s shares. Blackstone, which will pay Rs275 per share or a premium of 25% for the shares of Gokaldas, has invested $525 million, excluding Gokaldas, in India till date and intends on deploying $2 billion in the next two years. The deal, which will give Blackstone control over 46 garment manufacturing facilities with 46,000 employees capable of producing 2.5 million pieces a month,ranks third in India in terms of size, for Blackstone. It is believed that the Hinduja brothers (Madanlal, Rajan and Dinesh) will be investing the money coming in from the stake sale towards developing the apparel special economic zone planned by the group. Impact: 1. This deal has triggered consolidation in the scattered textile industry. This is likely to boost up Exports and for that Gokaldas Exports is well positioned. 2. The industry was long troubled a bit by the tight labour laws and seeking certain amount of reforms. In fact Private Equity Firms in India act more like Mutual funds due to the constraints in the market. But with the opening of the economy newer opportunities are available seeing the possible migration of “investments” into these sectors.

Indo Us (uclear Deal Fiasco The crisis, which started with the Prime Minister daring the Left to either accept the NDeal or withdraw support, seems to have only deepened over the last week. The CPI(M) General Secretary Prakash Karat said recently that the Left did not want the crisis over the Indo-US nuclear deal to affect the government.It is however clear that it is still opposed to the nuclear deal being operationalised and the government's future depended on the government itself. Left has also made it clear that the government can go to the coming meeting of the IAEA in Vienna, but cannot talk about the 123 deal. They plan to hold nationwide agitation from 1-16 September highlighting the adverse consequences on Indo-US nuclear deal and Indo-US strategic alliance. Despite all the dire warnings by the Left, Prime Minister Manmohan Singh , stood firm

on India going ahead with Indo-US nuclear deal. In a joint press conference with the visiting Japanese prime minister, Dr Manmohan Singh made it clear that India will go to the Nuclear Suppliers Group, a necessary step for the nuke deal to go through. Opinion: 1. According to one school of thought this Indo US nuclear deal is very important in terms of infrastructure for the country as that would help achieve more regulated power for India’s agriculture, industry and domestic consumption. But the Left is of the opinion that other sources of energy can be utilised namely Hydrocarbons, coal and Thorium-there being huge reserves for the latter in the country. 2. This turmoil is having its effect on the stock market. Because of the uncertainty in Indian Market, Investors have gone short in metals and auto stocks which in turn had raised the indices. But with the threat of midterm elections receding, the Indian stock market is improving. While the Midcap and small cap closed on a higher note, Nifty and Sensex also gained

Indian State Orders Closure of Reliance Retail Stores In a regressive move, guaranteed to dampen retail plans of organized retail corporations, the Uttar Pradesh Government has ordered the closure of modern organized retail chains in Lucknow and Varanasi, while setting up a five-member committee led by cabinet secretary Shashank Shekhar Singh to review all aspects governing such outlets. The UP government's reaction was triggered by an attack by a group of traders on Reliance Fresh and Spencer's retail stores in Lucknow, fuelled by reports of similar incidents at outlets in Varanasi. A decision on the eventual fate of large-format retail stores across the rest of the State will be once the five-member Committee submits its report. The committee would include Principal Secretaries of housing, home, agriculture and health as members, and would also look into the law and order, health, sanitation and location aspects of the existing and proposed retail stores. Impact: 1. The move will be increasing tensions between organized retailers and state governments, and small traders. The large retail chains provide infrastructure to carry the farm produce to the consumers with minimum wastage. As such this move will be very detrimental in many ways- lower returns to farmers, higher prices for consumers and reduced job opportunities. 2. This move will spell trouble for FDI in Retail because of low investor confidence.

WORTH A READ India Japan Strategic Perspective India's importance to Japan lies first of all in the shared values of the two countries: democracy, a market economy, a free market and the rule of law and the two governments are taking all necessary steps to further strengthen their relation. Prime Minister (PM) Shinzo Abe’s 3 day visit from August 21 follows PM Manmohan Singh’s visit to Japan last year. As Japan is reformulating its foreign policy in the quest to assure a greater leadership role in Asia, it finds that it shares an unprecedented convergence in interests, values and strategies with a rising India that is eager to “look east” and integrate itself into Asia and Asian institutions. So it is clear that Japan and India are likely to become closely tied partners in coming years based on common values and strategic interests and as a useful complement to Japan’s traditional strategic reliance on relations with the US. The use of the term STRATEGIC generally has two connotationsFirstly, it is a long-term relationship with a common vision and shared interests and concerns and not a tactical, short-term or fire-fighting relationship. Secondly, the national security of the two countries forms one of the components of the bilateral relationship. The areas of strategic convergence between India and Japan could be divided into the following three components: 1. Political: A common objective of securing the permanent membership of the UN Security Council. 2. Economic: Co-operating instead of competing with each other in meeting each other's energy requirements to keep their economies sustained and growing. 3. Security Related: Shared concerns over maritime and weapons of mass destruction (WMD) terrorism and WMD proliferation.

Main Endeavors 1. Both the countries have decided to enhance bilateral trade to $20 bn. By 2010 from $8.5 bn in 2006 2. They have also agreed to have a currency swap agreement that is likely to be signed before the year end. This would create a $3 bn fund which would be in the nature of a BOP adjustment facility. This means that if either country gets into a BOP problem, then the other country will give up to $3bn to help the other. 3. Japan could also consider Yen loan dedicated freight corridor and also look at the possibility of providing funds for the studies being done for the viability of the Delhi-Mumbai industrial corridor.

4. The two PM’s have also decided to explore the creation of Japan Depository Receipts (JDR’s) on the lines of Global Depository Receipts. These JDR’s could be a potential source of financing for private sector development in India 5. They have also called for enhancing tourist visits between the two countries to three lakhs by 2010 and five lakhs by 2015. So the two countries have reaffirmed the importance of delivering a high quality and mutually beneficial economic partnership agreement that reflects the strategic importance of bilateral relations and fully harness the potential of economic relationship between the two countries. Better relations with India will serve Japan well in the long term as it seeks to reassert its leadership in Asia, while a strategic partnership with Japan will increase the chances of India’s integration into the Asian political equation.