Biznews June 11 To June 30

BIZNEWS FOR THE PERIOD 11TH JUNE TO 30TH JUNE

BIZVOCAB – CURRENCY SWAP A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. Example from http://www.in-the-money.com/glossarynet/currency.htm American Firm A would like to borrow pounds, and British Firm B wants to borrow dollars. Because it is better known in the US, Firm A can borrow dollars at a lower interest rate than Firm B, while Firm B, because it is better known in the UK, can borrow pounds at a lower interest rate than Firm A. So if Firm A borrows dollars in the US and Firm B borrows pounds in the UK, but then they swap their obligations, each firm can benefit from the other firm’s superior borrowing rate in its domestic currency. Say Firm A wants to borrow £10,000,000 for two years, Firm B wants to borrow $16,000,000 for two years, and the current ($/£) pound exchange rate is 1.6. Assume that Firm A can borrow dollars at 8%, and Firm B can borrow pounds at 10%. The swap transactions that accomplish this are:

BIZ SNIPPETS IBM leads in race for Citi’s BPO arm Ø Global major IBM Corp is emerging as the front-runner in the race for buying Citigroup Global Services (CGS), the BPO arm of Citigroup. Ø Others that have been tipped as strong contenders include Infosys and Wipro, with Hyderabad-based Satyam Computer Services Ltd being the dark horse. Ø Citigroup is looking at the GE model for its deal. It is searching for a strategic partner for sale and also to maintain its stake in the company. Also, if Citigroup sells its BPO arm, it will get rid of the transfer price rule related to income tax. The group is reportedly set to pay a tax of Rs 300 crore on capital gains from the transfer of the shares, which are not listed. Ø According to analysts, this is a venture investment for Citigroup, since CGS has been taking a hit on its margins for sometime due to rising expenditure in manpower, branding and advertising. The company is taking advantage of the booming market to make profits. Moreover, BPO has never been Citigroup’s core business and the banking major has been looking to divest stake for a while now. RIL’s gas pricing formula draws flak from users Ø The selective bidding process adopted by Reliance Industries limited (RIL) to arrive at a market determined price of $4.79 per million metric btu (british thermal unit) for the sale of natural gas from its D6 block in the Krishna-Godavari basin has drawn sharp criticism from major user ministries— power and fertilisers. Ø RIL’s gas pricing formula, under the scanner of the petroleum ministry, is based on the quotes it invited from 10 customers (five each in the power and fertilisers sectors). Ø Based on these bids, the price quotes ranged between $4.64 per mmbtu and $4.86 per mmbtu. RIL has informed the petroleum ministry that using the formula, employed for the purpose of calculating gas price under a production sharing contract (PSC) with the government, the price of gas works out to be $4.79 per mmbtu. This price, if approved, will also be considered to calculate the government’s share of royalty and petroleum profit. The final delivered price to customers will be much more as this

price does not include the marketing margin, the risk management charge and the transportation cost. Strong Re leads to lay off in textile sector Ø The continuing appreciation of rupee may lead to closure of small and medium size spinning mills in the near future, causing lakhs (estimated 15 to 20 lakhs) of people to lose their jobs in textile and allied industries, according to the Clothing Manufacturers Association of India (CMAI), apex body of the Indian readymade garment manufacturers and retailers. Ø Currently, the textile and clothing industry provides direct employment to about 3.5 crore people while engaging another 5 crore people in allied activities. In fact, the Union textile ministry forecast that the textile sector would attract an investment of Rs 1.51 lakh crore by the end of 11th plan and generate employment opportunities to around 1.7 crore people, of which 50 lakh would be skilled employees. Govt to auction bonds worth Rs 100 bn on July 6 Ø The Government of India announced the sale of a new 10 year government stock for a notified amount of Rs 60 billion (nominal) through yield based auction using multiple price method on Jul. 6, 2007. Ø On the same day, on behalf of the government, RBI will sale (re-issue) ‘8.33% Government Stock 2036’ for a notified amount of Rs 40 billion through a price based auction using multiple price method. Ø The central bank has specified in its notification that up to 5% of the notified amount of the sale of the stocks will be allotted to eligible individuals and institutions as per the scheme for non-competitive bidding facility in the auction of government securities for both the auctions. Forex reserves touch USD 212.549 bn as on Jun. 22 Ø Forex reserves surged by USD 1.534 billion to touch USD 212.549 billion as on June 22, primarily on the back of jump in foreign currency and assets collections. Ø As per the weekly statistical supplement of the RBI released on Jun. 29, 2007, foreign currency and assets reached USD 205.178 billion on the back of USD 1.532 billion rise. Ø During the same period, reserve position in IMF increased by USD 2 million to USD 459 million. Ø On the other hand, gold reserves and the special drawing rights (SDRs) remained unchanged at USD 6,911 million and USD 1 million respectively during the same period.

Govt. to put price floor on exchangeable bonds Ø The government is likely to prescribe a minimum threshold coupon rate on exchangeable bonds in an attempt to ensure that only quality debt paper is issued in international markets. Ø Exchangeable bonds is a debt-equity instrument enabling companies to access overseas markets for raising capital by unlocking value in their strategic holdings in group companies. Ø The move can ensure that only better-known companies can issue such bonds against shares of their group companies, otherwise the instrument can be misused to launder money. Ø The government is engaged in preparing the guidelines for exchangeable bonds along with valuation norms which will determine a method for fixing the value of the shares underlying the bonds. The guidelines are expected to be issued shortly. Call rates climb up Ø Call rates seem to be rising on the quarterly cash requirement by the banks. The interbank rates observed an intra-day high of 8.25%, while the intra-day low was seen at 5.5%, on Jun. 28, 2007. Weighted average rate (WAR) was seen at 7.95% on June 28, higher than 6.58% on Jun. 27, 2007. The call rates moved in the range of 5% - 7.30% on June 27. Interestingly, the WAR was registered at 3.22% on day on June 26 when the rates moved in the range of 1.50 - 4.50%. The turnover of call money market increased marginally to Rs 128.56 billion on June 28 from Rs 122.763 billion on June 27. Govt may allow FDI in atomic energy Ø The UPA government may allow FDI in atomic energy while raising the foreign investment cap in the aviation sector by July end. Ø Inspired by a record FDI inflow of USD 15 billion in 2006-07, the government is set to go in for a big liberalization. It has set an FDI target of USD 25 billion for the current fiscal. Ø Regarding FDI in airlines, it is capped at 49% at present, while Greenfield airport projects are allowed 100% foreign participation. Ø While India and the US are engaged in negotiating the nuclear deal, a number of US companies from atomic energy sector have approached Indian business chambers, including FICCI, and showed interest in setting up joint ventures in India. Govt to consider 49% FDI cap in commodity exchanges Ø Cabinet will soon examine a comprehensive proposal to revisit the foreign investment norms, wishing to raise the investment cap to 49% in commodity exchanges and PSU oil refineries. Ø Currently, the Department of Industrial Promotion and Policy is engaged in preparing a note on the matter, which will be soon sent to cabinet for clearance.

Ø The department is likely to peg foreign investment cap in commodity exchanges at 49% with limit on FDI at 26% and FIIs at 23%, similar to the ceiling in stock exchanges. While an individual entity may allow to pick only up to 5% in commodity exchanges. For entities having more than 5% stake in commodity exchanges, some time will be given to bring down their stake to the stipulated limit. Ø As the government gave clearance to FDI limit in commodity exchanges, the Reserve Bank may issue guidelines for allowing foreign investors to pick up stake in the country’s commodity exchanges Maharashtra planning commission asks review of SEZ policy Ø State planning commission of Maharashtra observing that special economic zone (SEZs) will lead to an inequitable growth in the state, the commission has asked government to reassess SEZ policy. Ø It is interesting to know that of 400 odd SEZs coming up in the country, most are based in Maharashtra. Out of proposed 73 SEZs in the state, 48 proposals have so far received an in-principle approval from the state government Ø It also anticipated that industries in SEZs enjoying various tax benefits and relaxation in labour laws will garner monopoly in the exports, hampering growth of industries outside the zones. India, Indonesia recognizes SEZs as area for cooperation Ø India and Indonesia have identified other new areas of cooperation such as development of alternative energy sources and conclusion of a ‘mutual legal assistance treaty’ (MLAT) in criminal matters and extradition treaty. Ø The two nations have set up a trade target of USD 10 billion for 2010. Ø According to a joint statement issued by external affairs minister Pranab Mukherjee and his counterpart Hassan Wirajuda in Jakarta, cooperation in health and pharmaceuticals, oil and gas, and mining, biotechnology and women`s empowerment are other areas of cooperation. Ø In their meeting on June 18, 2007, the Indian delegation expressed appreciation at the extension of visa on arrival facilities to Indian nationals by Indonesia and also took note to simplify Indian visa grants for Indonesian nationals. Ø The meeting discussed the strengthening of cooperation in information technology, nuclear technology, biotechnology, tele-education, tele-health, and strengthening cooperation in space technology, especially after the successful establishment of the second telemetry tracking and command centre in Biak by ISRO and the recent piggy back launch of the LAPAN TUBSAT micro satellite by India in January 2007. India-Japan to grab currency swap deal Ø On the finalization of the agreement on the issue, both the countries will be in position to swap foreign exchange reserves to counter speculative moves on their currencies.

Ø Under this agreement, Japan will accept Indian Rupees and will give Dollars in exchange to India up to a stipulated limit, and similarly India will take Yen and provide Dollars to Japan if the need arises. Ø This deal will provide a major safeguard even if the forex reserves take a downturn in future. It was learnt that despite having a good position in forex reserves, India`s balance of payment position is not very healthy along with high deficit of the country. In this scenario, currency swap with important nations will be beneficial. Both, Japan and India have a significant amounts of foreign exchange reserves over USD 900 billion and USD 200 billion respectively. Ø Additionally, such agreement also boosts bilateral ties along with countering speculative attack on currency. However, Japan is making the signing conditional by insisting India to engage in an active IMF borrowing programme. Ø If the agreement is inked, it will be India`s first currency swap agreement with any country, though Japan has already inked such deals with a number of countries including China, South Korea, Malaysia, Thailand and Philippines. IDBI dilutes 2% stake in NSE for USD 50 mn Ø Mumbai-based Industrial Development Bank of India (IDBI) sold 900,000 equity shares constituting 2% of the issued and paid up capital of National Stock Exchange of India to MS Strategic (Mauritius) for an aggregate sum of USD 50 million on Jun. 28, 2007. Jet looking out for PE investors for JetLite Ø Jet Airways after acquiring Air Sahara converted the airliner into a low-cost carrier under the brand JetLite. Ø It is said that Temasek, Istithmar and TPG are the front runners to bag the deal. Jet may be willing to divest up to 25% stake in the airline and needs more than Rs 2 billion to revive the airline. Spice Communications IPO oversubscribed 37.63 times Ø Spice Communications` initial public offer (IPO) was oversubscribed 37.63 times on closing day i.e. Jun. 27, 2007. Ø A total of 4,256.89 million bids were received as against the issue size of 113.11 million. Ø The issue constitutes 16.39% of the diluted post-issue equity share capital of the company. The price band of the issue was Rs 41 to 46 a share. Ø The proceeds of the IPO will be primarily utilized for the repayment of debt, payment of license fee for national long distance and international long distance services and related capital expenditures and also for paying suppliers of network equipments.

SHORT SELLING (This write up is based on SEBI’s Discussion paper on Short Selling and Securities Lending and Borrowing) Capital market regulator, SEBI plans to issue guidelines on short-selling to enable institutional investors to sell stocks without owning them. Securities market regulators in most countries and in particular, in all developed securities markets, recognize short selling as a legitimate investment activity. What is Short selling? Ø The sale of a security that the seller does not own Present Indian Scenario Ø At present, there is no prohibition on short selling by retail investors. The “Institutional investors” viz. the Foreign Institutional Investors (FIIs) and the mutual funds registered with SEBI, banks and insurance companies are expressly prohibited under the respective regulations or statutes from short selling. Ø Finance minister P Chidambaram in the budget on Feb, 28, 2007 proposed to allow the same in the capital market. The SEBI-appointed secondary market advisory committee had also recommended short-selling by institutional investors in October 2005 Benefits of Short selling Ø A desirable and an essential feature of a securities market to provide liquidity Ø Profit from an expected downward price movement Ø To help price corrections in over valued stocks Ø To hedge the risk of a long position in the same security or a related security. Ø Many people are also of the opinion that restrictions on short selling distort efficient price discovery, gives promoters the unfettered freedom to manipulate prices, and favours manipulators than rational investors. They argue that in a declining market, short covering of positions opened at the beginning of the downturn, arrests the declining trend. Ø As per the FSA, “short selling also benefits the market as a support for trading that corrects pricing anomalies. Without the opportunity for arbitrageurs to lock in a profit by going short of the ‘overvalued’ instrument at the same time as going long of the ‘undervalued’ instrument, the efficiency of the price correcting process is correspondingly greatly reduced”. Risks Involved Ø Short selling can exacerbate market falls and lead to manipulative activities. Ø It can increase share price volatility, and force the price of individual stocks down to levels which might not otherwise be reached. In a bear market in particular, short selling can contribute to disorderly trading, give rise to heightened shortterm price volatility and could be used in manipulative trading strategies.

Ø Declining trend in the share prices of a company, can even impact its fund raising capability and undermine the commercial confidence of the company Ø Short selling may also increase short-term volatility in share prices Ø There are potential risks within the chain of the short selling process. These relate to the settlement process and efficient risk management in the operation of the securities lending market Mitigation of Risks Involved Ø In the Indian securities market, naked short selling should not be permitted and accordingly all investors would be required to mandatorily honour the obligation of delivering the securities at the time of settlement. Ø The stock exchanges should frame a uniform penalty structure and take appropriate action against the brokers for failure to deliver securities at the time of settlement which would act as a sufficient deterrent against naked short selling Ø Short selling may be permitted only in those stocks in which derivative products are available to ensure that market participants do not misuse short selling to distort the prices of illiquid stocks which are normally more prone to volatility and manipulation Ø The institutional investors would be obligated to disclose upfront at the time of placement of order whether the transaction is a short sale and demonstrate their ability to borrow to the satisfaction of the broker Ø Brokers shall be mandated to collect the details on scrip -wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day.

IMPACT OF DLF IPO ON REAL ESTATE COMPANIES Pre-IPO Scenario There was an unspoken apprehension about building up of a real estate bubble. Major causes included tightening monetary policy, increasing land prices, rising interest rates and discouraging governmental policies such as the newly framed ECB (External Commercial Borrowings) norms with respect to the real estate sector. Because of such an apprehension, the realty stocks including those of Sobha Developers, Peninsula Land Ltd., Akruti Nirman, Unitech, Parsvnath Developers etc. were facing a downturn. DLF Initial Public Offering Ø After almost a year of squandering, government finally approved the IPO on May 7, 2007. The issue opened on June 11 and ended on June14. The initial price band proposed was Rs. 500 – 550 with a value of Rs. 9625 crore on upper band. It was proposed to constitute 10.27% of fully diluted post-issue capital of the company. Ø It was oversubscribed 3.47 times. The company fixed issue price of Rs. 525, garnering about Rs. 9188 crore. The received bids worth about Rs. 25500 crore from the FIIs, was higher than about Rs. 17000 crore net FII inflows into Indian equities this year.

Ø When compared to the IPOs of other major realty firms like Sobha Developers and Parsvnath Developers, the response to DLF could be described at best as lukewarm. Parsvanth and Sobha issues which raised between Rs. 500 – 1000 crore, saw demand worth Rs. 60000 crore, nearly double of that for DLF. While Parsvnath saw an over-subscription of 60 times, Sobha witnessed the same of 114 times. DLF’s figure of 3.47 looks meager compared to these. However, analysts explain such a behavior mainly to the difference in conditions of real estate industry during these IPOs. Booming realty saw Sobha and Parsvnath getting highly oversubscribed, while apprehension about a housing bubble witnessed that of DLF getting “just about fully subscribed” (especially by retail investors). Post IPO Scenario Ø Several realty companies were closely looking at the DLF IPO. After witnessing the response to the IPO, atleast 7 more real estate, construction and infrastructure companies have lined up offers to collectively raise over Rs. 6000 crore from the market. Ø Even though the response to DLF was only lukewarm, it was perceived to be much better than expected. According to several merchant bankers, fund seeking realtors now prefer IPOs over private equity irrespective of the recent talk of the housing bubble. Ø The investor interest in realty stocks has seen an upward trend post the fullsubscription of DLF IPO. The best Pre-IPO vis-à-vis Post-IPO scenarios of realty firms is tracked by the stock of Sobha Developers, which suddenly saw shooting up after days of a downward trend. The trend of Parsvnath was a replica of that of Sobha.

DLF Issue Date: Jun 11, 2007