Education, a sector much in demand by private equity (PE) and venture capital (VC) firms in 2011, has been largely overlooked by investors in the first half of 2012. Industry sources say the funding in H1, 2012, dropped by as much as 50 per cent compared with the same period in 2011. In the first half of 2011, PE and VC investors had pumped in about $100 million into the education space. In August 2011, the Associated Chambers of Commerce and Industry (Assocham) came out with a report anticipating Rs 4,500-crore worth investments by PE and VC firms in education by 2014.But the sudden drop in 2012 has not been totally unexpected. The global economic scenario and regulatory uncertainty have played their role in subduing the investment climate this year. "There is a steep drop in the number of deals this year given the economic scenario and the fact that education sector has matured in India," says Bharat Gulia, senior manager, education practice, Ernst & Young.Though Gulia expects the second half to attract higher investments into the education space, Indian Venture Capital Association (IVCA) president Mahendra Swarup does not see any improvement until there is clarity in the regulatory environment."The year is going to be slow for investments in education space as most of the investors who like the space have already put in their money and bigger private equity firms are not yet hot on this sector," says Swarup. "Second round of funding for most of the companies is becoming tough," he adds.Experts believe increased competition and too many players entering the education domain also caused investments to slow down a little.Whether it is the much debated Right to Educations Bill or confusion around University Grants Commission (UGC) regulations on collaboration between foreign universities and India or other regulatory hurdles; such issues have made larger PE investors to overlook the education space.Gulia, however, believes investors are still ready to invest in categories related to consumers and since India has a population of more than 600 million in 0-24 age bracket, the spend on education is very high."Due to regulatory issues there is reluctance to investment in core education and so most of investor lies in non-core education space," says Gulia, who is expecting companies in the content development, supplement education and pre-school area to attract some funds in second half of the year.Classteacher Learning, whose solutions encompass digital classrooms, science and language labs and web based learning, got $15 million funding from Fidelity Growth Partners India in June 2011. It is expecting to raise another $25 million in next few months."Last year a lot of funding has gone into teacher technology like whiteboards etc but the next round of funds will go into development of content for students, education apps and technologies like classpads etc," says Classteacher Learning Systems CEO Rohit Pande.Pande will utilise the next round of funds to increase penetration of its educational tablets — for school students — introduced in January 2012.Pande agrees that raising funds this year is difficult than what it was last year. "Volume growth in education sector is still there but investors now are looking for profitable growth. There is still a market for innovation and that will continue to attract funding," he adds.Pande has company in Kunal Bhadoo, Chairman & CEO, Kunskapsskolan Eduventures. "There is a volatility in the overall market and we will see restricted funding but people are still bullish about the education sector which is recession proff and does not see boom and bust," says Bhadoo. But the market is mature and innovative ideas will drive funding just like his venture did. Sweden's largest non-governmental school Kunskapsskolan has set up Kunskapsskolan Eduventures Pvt Ltd — a joint venture between Kunskapsskolan Education and Gyandarshan Eduventures — to open its first Kunskapsskolan School at Gurgaon by April 2013, offering K12 education to Indian and international students.Universal Business School, a premium green B-school founded by Tarun Anand is also looking to raise debt funding of Rs 8 to Rs 10 crore in next 6 months. The institute recently received funding of $1 million. "The investment environment is drying up, across the board people are holding back and sitting on cash. The only worry is that paucity of funds at this growth stage in education sector will impact 2014-2015," says Anand. "Earlier people were investing across the board but now they have realised it is a long-term play, so the old wild days of investment are gone," he adds.
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The world's problems are caused by excess liquidity and it cannot be cured by adding more. It's like treating the problem of alcoholism by alcohol. Whether we like it or not, the world has to go through 2–3 years of rehab before this problem can be cured.What politicians are doing right now is just delaying the problem and not solving it. They are just giving more alcohol to an alcoholic to reduce the immediate pain, which is increasing the damage (bubble) rather than reducing it. Sooner or later, in the near future, they will have to solve this problem and the best of economists can't predict the time because it would be a fallout of political equations also rather than just economic equations. A doctor (economist) can only recognise the problem and suggest immediate treatment; ultimately the patient's (world economy) family members (people / voters & politicians) have to force upon the hard decision of going for rehabilitation.The best way to solve a problem is to first recognise the problem. After that, generally, things are not that difficult. As individuals, once we have recognised the problem, while we are waiting for politicians to decide when they want to tackle the problem, we should do our own planning to ensure that impact of the financial crisis on ourselves is minimum.Here we should recognise that once the world economy goes into rehabilitation, there would be periods of pain and if there is a bubble burst in the world, no matter how much we prepare, we cannot escape totally unaffected. The idea should be to minimise the impact to tolerable limits.Again, we should recognise that impact may not directly impact us but can impact us indirectly. For example, your spouse or your brother might lose his job and you might have to support him. Or you might not be leveraged but your father might be and you might have to pay for his debts. Hence when you are getting your house in order it's important that you make sure that your near and dear ones for whom you feel responsible also gets their house in order.I would suggest the following key steps to prepare for the rehabilitation:Reduce Leverage: The first and the foremost thing that we need to do are is to reduce our leverage. We are lucky to have seen the trailer of this upcoming financial crisis in 2008 and should take clues from it. That time we saw what happens to the patient when he is put into rehabilitation, just that we could not see his pain and agreed to give him more alcohol. Just think of a situation when liquidity (alcohol) is sucked out of the financial markets (patient's veins). Remember, as individuals, we are not ‘too big to fail'. Our investment in bubble assets like real estate etc might be worth a fraction while our debts against them stand as it is. We should try to square-off our leverage positions as much as possible. In the greed to maximise returns, we might leverage now and also gain till music stops. But once it stops, we would lose even our principal.Avoid Real Estate For Investment: In last 8 years, real estate has given an average annual return of around 30 per cent and hence out of fear of missing the bus, we want to buy property. Secondly, due to excess liquidity, no other asset class has been able to give similar returns, not even best of businesses. Hence everybody wants to invest in property where not only one is getting higher return but also has good opportunity to leverage. However, it's not sustainable and if you see the history of financial crisis, including USA's real estate market after 2007 or South East Asian market after the 1997 crash, each downturn (rehabilitation phase) is marked by a steep fall in real estate prices.If you are buying a house for own use, with limited leverage you can go ahead, because it is difficult to keep postponing comforts for one's family members. However, if you are leveraging yourself to buy property only for investments, please avoid. Real estate is a depreciating asset and 20 years down the line you would not be able to live in the property you are buying today. Tell me how many properties you have recently considered buying is 20 years old?Invest In Yourself: Go for the higher education you had been postponing for a while. Ask your employer to send you for the training you always wanted to go for. Read up when you get time, develop new skills. No investment can fetch you higher return than your investment in yourself. It can also protect you better in recession time when companies are cutting jobs across the board and you might find yourself in the wrong place at the wrong time.Get Medical Insurance For Family: We should get medical insurance not only for ourselves but for all the family members for whom we are responsible, and in case of medical emergency we will end up footing the medical bill. We should not rely on the company provided medical insurance and should take a separate medical insurance because you if you lose your job you will also lose the medical cover provided by the company. During 2007 financial crisis in USA, many people were willing to work for zero salary just to take benefit of the company's medical cover. Medical emergencies are biggest risks to one's planning and in today's world can drain out all the savings you might have made for the rainy day.Understand The Bubble Points (Real Estate, Commodities, Financial Sector): Due to worldwide excess liquidity, major bubbles are formed in real estate, financial sector and commodities. If you are exposed to these sectors due to your job or any other reason, create a good plan B. Lot of financial intermediary jobs like private equity, equity researchers, brokers, analysts, wealth managers have been created in the last decade due to extra liquidity. Once the liquidity is sucked out, a certain percentage of these people would lose their job and a certain percentage will have to live with pay cuts.Similarly, due to excess liquidity, prices of commodity like crude, iron ore, coal etc. have run up. This excess demand is not only due to excess investment in unsustainable assets but also speculative investments by investors sitting on lot of liquidity and who believe in high leverage. The crash in prices would badly impact countries that are dependent on exports of commodities like Australia, Russia, Brazil, etc. On the other hand, countries like India, which is majorly an importer of these commodities, would gain from a crash in prices of commodities like crude. Hence, it's important to understand whether you are on the buy side or the sell side of these commodities to understand the risk.Understand Currency Risk: Unlike many of the previous downturns, the relative purchasing power of different currencies is in the heart of this crisis. Hence people who are exposed to currencies like US Dollar, Euro, Brazilian real etc need to be aware of this fact and accordingly hedge themselves. It's difficult to predict whether hegemony of US dollar would end or not in the next few years but surely it's not a safe haven and should not be looked at like that. When the liquidity is sucked out, first reaction of the financial world might be to move to safe haven of US Dollar but soon they would realize that it's a ‘financial cliff'. Again, gold is not a safe haven. Chances of the world moving back to gold as the under-lying asset is very remote and the new standard would most probably be based on a basket of commodities/currencies.Understand Cross Country Trade Risk: At the heart of current financial crisis is the currency risk and hence we should be very aware of cross country trade risk if we are into international trade or similar business. Proper hedging tools should be used for international transaction. Remember that one might be right about the movement of currency but one needs to get the timing also right which generally is much more difficult. Lot of people in the world are predicting that the US dollar would eventually crash and most probably they would be right but nobody is able to predict when and that's the crucial part. During the 2007 crisis, many people incurred heavy currency losses because they were betting against the US dollar while the currency appreciated as it was considered a safe haven.If I have scared you, I must make it clear that this is not the end of the world. The economy always goes through such economic cycles every 5–7 years. People who prepare themselves well for the downturn are able to make most of the upturn. This downturn would be in many ways a blessing in disguise for India. Crash in commodity prices would lower our import bill of crude which will solve the current account deficit problem and also reduce our subsidy burden. Relative strengthening of the Indian rupee against developed country currency like US dollar and the euro will help us retain our talented manpower in India and utilise their talent to build domestic consumption focused industries. For example, an industry like infrastructure would be able to attract the much needed engineers who today are keener to work for IT assignments for foreign clients. While you are making investments in shares today, go for companies which are focused on domestic consumption specially those who are importing large part of the input commodity.Remember in our life time we would see many such economic cycles. The art is to survive the bad times so that we can make most of the good times. By playing safe today you might not make as much money as your neighbor is making by leveraging, but at the same time, unlike your neighbor you would not lose everything that you have earned, when the bubble burst. Anybody can be ‘the king of good times', the real test is when the tide turn.(The author is VP, Finance and Gas Business of H-Energy, a Hiranandani Group company)
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The government is unlikely to sell a partial stake in Steel Authority of India, and will wait for a further recovery in the share price, according to analysts.The cabinet is meeting on 19 July to discuss a potential sale of part of the government's 85.8 per cent stake in the country's largest domestic steel maker.India has previously said it plans to sell stakes in 15 state-run firms by the end of March 2013 in a bid to raise 300 billion rupees to help narrow its fiscal deficit."Valuations and price needs to grow before government can divest stake in the company. It's highly unlikely that government will sell stake at current prices," said an analyst at a large domestic brokerage who tracks the company.SAIL shares are trading well below the one-year high of 135.25 rupees hit on July 26, 2011.Shares in SAIL was trading flat at 93.20 rupees, after earlier gaining as much as 1.2 per cent.(Reuters)
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The BSE Sensex rose on Wednesday as power utilities gained after a proposed tariff hike in New Delhi, while infrastructure stocks such as BHEL advanced on hopes for a renewed push by the government to increase investment in the sector.Sentiment was also boosted after Deutsche Bank upgraded Indian stocks to "overweight" from "neutral," calling them close to the cheapest in two decades. The action followed a J.P.Morgan upgrade to the same rating last week.However, investors remain cautious ahead of the expiry of derivatives on Thursday, and ahead of a European Union summit starting on the same day that is expected to deliver little in terms of meaningful action on the euro zone debt crisis."People are expecting the announcement of new finance minister soon. If the Prime Minister keeps the position, it can be a boost to markets in terms of stalled infrastructure projects and other reforms," said K. Alex Mathews, head of research at Geogit BNP Paribas.The BSE Sensex rose 0.36 per cent to 16,967.76 points, a second consecutive day of mild gains.The Nifty added 0.41 per cent to 5,141.90 points.Hopes about Singh's commitment to infrastructure have been raised after he assumed an additional role as acting finance minister after previous incumbent Manmohan Singh stepped down on Tuesday.The Prime Minister Office had been actively involved in pushing ahead with major transport and power projects this year, convening a meeting of relevant ministries.BHEL gained 0.6 per cent, while Reliance Infrastructure rose 2.02 per cent.Power utilities were also among the day's leading gainers after Delhi Electricity Regulatory Commission proposed a 24 per cent hike in power tariffs for household consumers in New Delhi and a 19.5 per cent hike for commercial consumers.Reliance Infrastructure rose 2 per cent, while Tata Power added 2.2 per cent.State-run power sector lenders advanced on expectations utilities would be better placed to pay back their loan commitments.Power Finance Corp gained 5.2 per cent, while Rural Electrification Corp added 4 per cent.Strides Arcolab gained 2.7 per cent after the company said it had redeemed $80 million of outstanding foreign currency convertible bonds, removing a key concern for investors. However, among under-performers, State Bank of India ended flat per cent after Morgan Stanley maintained its "underperform" rating on the stock, expressing concerns about asset quality pressures after meeting with management.(Reuters)
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One of the offshoots of a faling rupee has been that global private equity funds, which poured tens of billions of dollars into India investments when the economy and currency were flying high, may be stuck with those holdings much longer than planned as the rupee's plunge plays havoc with their exit options.The sharp fall in rupee against the US dollar has prompted many foreign private equity funds to up their return expectations in rupee terms for new investments in India.The rupee is now down by nearly 20 per cent against the dollar from a year ago, adding to the several previously unforeseen challenges for the PE investors. For every investor realising a 15-per cent return on equity investment, the gains will be nullified if rupee slides 15 per cent. For investment made one year back, the return in such a case will be negative due to 20 per cent fall in rupee. Returns on funds raised in dollars have shrunk with the currency's tumble to record lows, compounding the effects of a weak stock market and slowing growth, and threatening to further dampen private equity interest in Asia's third-largest economy.Srinivas Chidambaram, managing director at Jacob Ballas Capital India, of the rupee's steep slide since August says "this has simply shaved off nearly a year's implied return.""The depreciation is clearly a matter of concern in the medium term as it impacts exit realisations and existing portfolios," he said. His company, an offshore fund backed by New York Life Insurance Co, manages $600 million in India.However, that does not mean the global PE funds have gone dry on India. While Asian private equity is set to see a boost in allocations from North America and Europe in the next few years, Australia is seen as the most attractive market for buyout deals, as indicated by about 39 per cent of LPs across all regions, followed by China with 30 per cent. Indonesia and India were deemed appealing by about 25 pwer cent of investors.The currency risk could dampen private equity investments in India which, including venture capital deals and stakes in listed companies, rebounded to $13.5 billion last year, up 64.3 per cent from 2010, according to KPMG. The peak year for private equity investment in India was 2007, at $14.1 billion.Last year, exits were down 38 per cent from a year earlier, at $2.8 billion, the KPMG data showed. "Most funds are not keen to exit their investments now," said Jacob Mathew, managing director of Mape Advisory Group, an Indian investment bank that handles private equity deals.Investor OptimismA latest survey by Bank of America Merrill Lynch (BofA-ML) show fund managers have pared their underweight positions on India in June, even as they have reduced their overall exposure to emerging markets to the lowest level since October 2011.India, the third least-preferred among the emerging markets, has seen its underweight position coming down to 35 per cent in June from 55 per cent last month, according to the latest survey of fund managers by Bank of America Merrill Lynch (BofA-ML).However, India hasn't seen any improvement in fund allocation by global investors, as they have gone underweight on emerging market equities in June for the first time in seven months.For Asia-Pacific LPs, India is in the bottom three for buyout investments over the next two years. For venture and growth capital investments, India is the second most favoured destination after China. For global LPs, China, India and Indonesia are the most attractive destinations for venture or growth investments in the region. There is an interesting discrepancy between views of LPs in different regions about India, It seems India's neighbours are less optimistic about the country's PE industry than those farther away, he said, adding that it is a reflection of what is happening in the local PE market, pointed out a report in Business Standard.The desire for greater Asian PE exposure is in line with investor optimism for the region, in contrast with dampened sentiment towards the West.Also, the tumble in the rupee comes on top of a slump in share prices, with the BSE Sensex sliding 25 per cent last year, although it has recaptured some of those losses with a gain of about 9 percent so far this year.And while the outlook for protracted weakness will give many investors pause, Mape Advisory Group's Mathew said it also makes Indian assets attractively cheap."If the rupee remains at these levels, we will see more fresh investments than exits," he said.How Did Things Change?As JM Trivedi, Partner and Head of South Asia, Actis, writes in Business Standard, the world was a different place in early 2008. The mood was bullish in India — over 2005-08, private equity (PE) investments in India had grown 10 times. Nearly $50 billion was raised during this period for investment in India, of which $20 billion was yet to be invested at the end of 2009, as the global recession took hold and investment activity froze. So, what went wrong? In the past, the PE industry relied on earnings growth led by strong revenue expansion and multiple arbitrage to deliver returns. After the financial crisis, the earnings growth declined and multiple arbitrage (between entry and exit multiple) vanished. In fact, in many deals done before the financial crisis, the arbitrage is likely to be negative.The Rupee ConundrumComing back to the curse of falling rupee, it is Asia's worst-performing currency over the past 12 months, shedding more than one-fifth of its value to hit a record low last Friday at 57.32 to the dollar. In November 2007, at the height of a boom in private equity investment, it marked a decade high of 39.03.India has proven a tough market for global private equity companies once captivated by its growth potential.Fierce competition for deals, few willing sellers, a regulatory ban on leverage and a fickle market for exits through IPOs meant many private equity firms have had to content themselves with minority stakes, often in listed companies.KPMG figures $31.5 billion was invested in India by private equity funds during the boom period of 2006 to 2008, with less than 10 per cent of that having exited as of the end of 2011. Typically, private equity investors look to sell off their investments in roughly five years."There is at least one year extra time required for portfolio companies to now deliver the returns," said Subbu Subramaniam, founding partner of M Cap Fund Advisors, which has invested in consumer products maker Jyothy Laboratories Ltd and City Union Bank.In one boom-time deal whose paper loss has been exacerbated by the drop in the currency, US private equity fund Warburg Pincus, one of the most active India investors, in August 2007 paid $98.5 million for a small stake in Indian engineering firm Punj Lloyd at Rs 275 a share.Since then, the rupee is down 27 per cent and Punj Lloyd stock is down nearly 83 per cent, and the stake is worth just $12 million.Caught Off-GuardThe rupee has been under pressure as India's economy weakens and investors worry about a widening current account deficit. Ratings agencies Fitch and Standard & Poor's, citing fiscal policy woes and risks to growth, have cut their outlook on India's credit rating, threatening its investment grade status.The Reserve Bank of India, which has stepped into the market to sell dollars, on Monday announced a rise in foreign investment limits in government bonds and other steps to bolster the rupee, but the currency drew little support as the market had hoped for more aggressive measures.The sharp drop in the rupee late last year, and again since March, caught companies, investors, and policymakers off-guard."The speed and magnitude have been significant. It adds to the risk profile of our investments," said Devinjit Singh, managing director of the India buyout fund at Washington-based private equity giant Carlyle Group, which has invested $800 million in India, according to its website.Traders and economists expect the rupee to remain weak as Europe's protracted debt crisis steers investors away from risky assets and India's economy sputters at its slowest in nine years, growing at 5.3 per cent in the March quarter. (With Agencies)
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Prepped up by hopes of big measures to kickstart the economy as India had been led to believe by the outgoing finance minister Pranab Mukherjee, India took a handful of measures to prop up the embattled rupee on Monday, including hike in FII limit into sovereign debt and liberalising overseas borrowing norms for exporters, but failed to arrest slide in rupee and stock markets.The much-hyped measures, aimed at increasing overseas capital inflows, fell short of market expectations. The rupee touched a record low of 57.92 against a dollar, immediately after simultaneous announcements by RBI and the government.The stock market too gave away the early gains and the Sensex closed 90 points lower. The measures will have limited impact on the currency in the short run, the prime minister's top economic adviser C. Rangarajan told television channels.The foreign institutional investors (FIIs) can now invest $20 billion into government securities (G-Sec), against the present limit of $15 billion.Within this limit, sovereign wealth fund, insurance funds, pension funds, foreign central banks and multilateral agencies can participate. The lock-in period for FII investment up to $10 billion into G-Secs has been reduced to three years from five years, according to Finance Ministry.Companies in the manufacturing and infrastructure sectors with three-year track record of forex earnings, can now raise external commercial borrowings (ECBs) up to $10 billion a year."We are looking at companies which have a large export potential to access money from abroad and have a large investor base," Joint Secretary in the Finance Ministry Thomas Mathew told reporters.As a further liberalisation measure, individual overseas investors can now bring in up to $3 billion into mutual fund debt schemes which invest up to 25 per cent of their assets in infrastructure. Earlier, the limit was 100 per cent.Planning Commission Deputy Chairman Montek Singh Ahluwalia said, "We will soon see (more) measures ... on implementation of large projects on which the Prime Minister has set up new mechanism to move things faster. .The decisions have been taken "in consultation with the government," the RBI said, adding that they will widen foreign investor base for government securities (G-Secs).With Monday's measures, the indicative annual ECB ceiling for Indian companies now stands at $40 billion, up from $30 billion.India Inc has raised $34.40 billion by way of ECBs in 2011-12 fiscal. In the April-May period of the current fiscal, the companies have already mopped up $5.97 billion.Besides, the government today also rationalised norms for FII investment in long term infrastructure bonds. At present FIIs can invest $25 billion in such bonds.Of the $25 billion, they can invest USD 10 billion in Infrastructure Debt Fund (IDF), with a reduced lock-in period of one year, from three years, the finance ministry said.Besides, FIIs can now invest up to $12 billion in long term infra bonds having a lock-in period of one year and a residual maturity of 15 months."The measures are aimed at greater flow of funds into the infrastructure sector. We expect enormous flows through qualified foreign investors (QFIs) in the next 18-24 months," Mathew said.He further said that the government is working on the proposal to bring down withholding tax on interest payment on ECBs to 5 per cent, from the present 20 per cent, for three years as announced in the Budget."The increase in the ECB and G-Sec limits will be positive for the INR in the near term but are unlikely to have any immediate impact on the equity markets," Religare Capital Markets MD & Head of Equities Gautam Trivedi said.Falling MarketEarlier, the rupee rallied on Monday on hopes for government measures to halt a slump in the currency, which hit a record low on Friday, with traders saying action to boost long-term foreign investment would be the most effective step.However, the rupee and BSE Sensex trimmed gains after the Reserve Bank of India announced it would raise investment limits in government bonds, disappointing investors who had expected bolder measures.Abheek Barua, chief economist, HDFC Bank said these measures, if they are the complete set of measures, are tame, and disappointing compared to the market expectations. The market was expecting hefty inflows through some millennium deposit scheme, or so, but these measures alone won't do much. "Global factors are likely to take over, and negative momentum may return and the rupee may breach 57 to a dollar and beyond. Will wait for the rest of the day, to see if more measures are coming."As Jonathan Cavenagh, snior forex strategist, Westpac, Singapore said it was not quite the 'shock and awe' the market was looking for but "we shall see what else gets announced. Not surprised to see USD/INR higher"."Until they address longer term structural issues around capital flows and competition in the domestic retail sector which can help bring down inflation pressures, I think market will be left disappointed," said Caavanagh.M. Natarajan, head of treasury, Bank of Nova Scotoa, Mumbai said "the market was expecting a slew of measures. The measures announced now won't have any direct material bearing on the rupee. Unless the RBI comes in with more measures, the rupee will fall back to the 57-58 to a dollar levels."The rupee posted its worst weekly fall in nine months last week, having slumped to a record low of 57.32 against the US dollar on Friday, hurt by dollar demand from oil firms and gold importers as well the broad risk-off sentiment.The Reserve Bank of India left interest rates unchanged last week, defying widespread expectations for a rate cut as it warned that doing so could worsen inflation, disappointing markets.To add to the pessimisic views, the economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment.Standard & Poor's has said that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.Industrial output rose just 0.1 per cent in April, lower than expectations in a Reuters poll for a 1.7 per cent increase. Output fell in March from a year earlier by 3.5 per cent. Economic growth slowed to 5.3 per cent in the March quarter, its weakest pace in nine years and sharply off 9.2 per cent rise in the year-earlier period.Price pressures remain high with the wholesale price inflation accelerating to 7.55 percent in May from a year earlier, driven by double-digit rises in food and fuel prices.The government was expected to introsuce bonds for non-resident Indians with an interest rate of 7-9 per cent, a source with knowledge of the matter said, as speculation over imminent measures was rife in India's markets.Traders and analysts said measures could include changes to foreign bond investment limits to attract more inflows into government and corporate securities. Another possibility would allow oil importers to buy their dollars directly from the Reserve Bank of India (RBI) rather than via the foreign exchange market."The impact will be temporary unless long-term steps like boosting FDI and curtailing current account deficits are taken," said Kumar Rachapudi, fixed income strategist in Singapore at Barclays, which expects the rupee to strengthen to 52 to the dollar by the end of 2012.However, analysts said these sorts of measures would provide only stop-gap relief and that India needed to improve its economic fundamentals, including addressing its current account deficit, to bolster the rupee."A sustainable solution would need a reduction of the current account deficit to around 2-2.25 percent of GDP with tighter fiscal policy, acceptance of slower consumption growth, and implementation of reforms that improve the business climate to encourage FDI inflows," the bank said in a client note.Range Of PossibilitiesRBI has discussed with state-run oil firms steering 50 per cent of their dollar purchases via a single state-owned bank to smooth volatility in the rupee, though no decision has been made, two oil executives said on Friday.Dollar purchases from oil companies account for around $10-$12 billion of dollar demand in domestic currency markets each month, according to HSBC.Another measure might be to provide a special central bank window to sell dollars directly to oil companies, traders said.India needs to shore up its credibility among investors, both in sticking to its projected fiscal deficit of 5.1 percent for the fiscal year ending March 2013 and to narrow its current account deficit, analysts said."In the short term, apart from augmenting capital inflows via a special dollar deposit scheme, we believe policy makers have few options to manage exchange rate volatility if risk aversion in global financial markets continues," Morgan Stanley wrote.Another option would enable the RBI to provide dollars to oil companies against oil bonds, which would help in removing dollar demand from the market and containing rupee volatility.Standard & Poor's and Fitch Ratings have cut their outlook on India's sovereign ratings to negative, threatening its investment-grade status, citing slowing policy reforms.Moody's Investors Service on Monday though said it was maintaining a stable outlook for India's Baa3 rating. It said slowing growth and higher levels of inflation were already factored into the outlook.In a shot in the arm for the economy, Sweden's IKEA, the world's largest furniture retailer, said on Friday it would invest 1.5 billion euros to open 25 stores in India.
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Companies looking to repay foreign currency convertible bonds will see their interest expenses rise 25 per cent on average due to higher refinancing cost, Standard & Poor's said, amid risk aversion globally and a sharp fall in the rupee.Several companies had issued foreign currency convertible bonds (FCCBs) at zero or very low coupons about five years ago counting on a booming stock market and risk-on appetite.However, the recent sharp downturn in the Indian stock market along with the rupee slide eroded expectations of gains on such issuances, sending companies scrambling for funds to meet repayment obligations.S&P estimates the cost of raising funds through external commercial borrowings will be about 6 per cent, while it will be 10-12 per cent from domestic banks. Both options are much higher than the cost of FCCB issuance."On an aggregate basis, we estimate that FCCB issuers will have to pay $700 million a year in additional interest - if they can refinance their FCCBs maturing in 2012," S&P said.The agency estimates only five of 48 companies with FCCB repayments due in the remainder of 2012 will be able to pay off their debt, while 28 companies will have to recast their debt in the absence of suitable refinance options."Of our rated entities, Tata Motors Ltd (BB-/Stable) is likely to redeem its FCCBs at manageable costs this year and Tata Steel Ltd (BB/Stable) has already rolled over the maturity of its bonds," it said.S&P expects companies to stay away from issuing such zero-coupon FCCBs with high conversion premiums as appetite for risky assets has soured globally, while the rupee slumped."Most of the FCCBs that mature in 2012 were issued in 2007-2008, when the rupee was at about 42 to the dollar. The rupee has now plummeted more than 30 per cent...This would add about 100 billion rupees to the value of FCCB maturities in 2012," S&P said.The rupee touched a life-low of 56.55 to the dollar on Thursday, within three weeks of its previous record low of 56.52. (Reuters)
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J.P. Morgan upgraded Indian equities to "overweight" from "neutral", despite acknowledging the risk factors facing the economy, encouraged by what it called a number of more positive factors including historic valuations. The move also boosted the Indian stock market benchmark index sensex by 0.9 per cent.The bank said its year-end target for the Sensex was at 19,000 points, a nearly 12 per cent upside from current levels.It expects the broader 50-share Nifty to trade in a 4,800-5,200 range in the near term.The US investment bank upgraded its call on Indian equities from "neutral", citing a number of factors including historic valuations, expectations for monetary stimulus, lower oil prices, and a weak rupee.State-run refiner Hindustan Petroleum Corporation gained 3.7 per cent, while producer Oil & Natural Gas Corp rose 0.7 per cent.Slowing Policies Still A HindranceSlowing policy reforms, however, remain a hindrance to economic growth and would be key to a recovery, J.P.Morgan said."If policy actions manage to revive corporate and consumer confidence, growth may accelerate into the second half of the fiscal year," the bank said in a note Thursday.Despite calling the environment "clearly poor," because of risks including slowing economic growth, J.P.Morgan argued Indian valuations are trading at 12 times forward earnings, or one standard deviation below the 10-year historic average.The Reserve Bank of India's 50 basis points cut in interest rates in April and its combined cut of 75 basis points in the cash reserve ratio so far this year should start impacting the economy late in the year, it said.A slumping rupee would boost trade, while lower oil prices would ease pressures on India's current account and fiscal deficits, J.P.Morgan added.The investment bank said it remains "overweight" on private banks, citing "strong" growth in revenues on the back of loan growth momentum.Its other "overweight" sectors are IT services and health care as part of a strategy of focusing on sectors that stand to benefit from rupee depreciation.The rupee slumped to a life low of 56.55 to a dollar on Thursday, as less aggressive monetary easing from the US Federal Reserve and weak data from China and Germany fanned risk aversion.However, J.P.Morgan is "underweight" on consumer discretionary goods given a "demanding" base effect and "adverse" impact from the government's push towards fiscal consolidation.The bank is also "underweight" on energy and materials. (Agencies)
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Global agency Fitch Wednesday revised downwards credit rating outlook of 12 financial entities including State Bank of India (SBI), ICICI Bank and Punjab National Bank (PNB) to negative, following a similar revision for India's sovereign outlook.However, the market shrugged off the action and most of the stock affected by rating action ended in green, as did the BSE benchmark Sensex and NSE Nifty.On the BSE, Shares of SBI settled 0.65 per cent higher at Rs 2,116.70, while ICICI Bank was up 0.83 per cent at Rs 833.30.PNB gained 0.43 per cent and Axis Bank moved up by 0.23 per cent. Among others, Bank of Baroda rose by 1.39 per cent, Canara Bank was up 0.89 per cent and IDBI Bank climbed 1.07 per cent. The BSE benchmark Sensex ended at 16,896.63, up 36.83 points. Barely two days ago, Fitch had lowered the credit outlook of the country from stable to negative citing corruption, inadequate reforms, high inflation and slow growth. At that time, Finance Minister Pranab Mukherjee had said that the downgrade was based on older data.Also the Fitch downgrade had come two months after the downgrade by S&P, another rating agency. The Chief Economic Advisor Kaushik Basu had said it was a result of the herd mentality of the policy takers.The downward revision in outlook may result in increased cost of fund from overseas. The first to be affected may be the State Bank of India which recently announced its plans to raise $2 billion from overseas market."The outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counterparties and holdings of domestic sovereign debt," Fitch said in a statement.The list of downgraded entities include six PSUs and two private banks. These include Bank of Baroda (BoB) and its overseas subsidiary Bank of Baroda (New Zealand), Canara Bank IDBI Bank and Axis Bank.Others to be affected by the rating action include Export-Import Bank of India, Hudco, IDFC and Indian Railway Finance Corporation.Commenting on the Fitch action, Bank of Baroda Chairman and Managing Director M D Mallya said, "This is because of the action which they (Fitch) have taken on the sovereign."Private sector lender Axis Bank said the rating action will not have impact on the bank."Investors are tired of downgrades that is why these stocks did not show any adverse reaction to the Fitch rating outlook," CNI Research Chairman & Managing Director Kishore Ostwal said."We do not anticipate the present action to have any material impact on the bank," Axis Bank President, Treasury and International Banking, P Mukherjee said.Following the sovereign rating action on June 18, outlook of seven PSU including NTPC, SAIL, IOC, PFC, GAIL, REC and NHPC has already been lowered to negative. In all, the Fitch action has affected 19 Indian entities."The outlook revision of the financial institutions reflects their close linkages with the sovereign by virtue of their high exposure to domestic counter-parties and holdings of domestic sovereign debt," Fitch said in a statement.Rating Not To Affect Overseas Borrowing: SBIState Bank of Indian Managing Director Diwakar Gupta told PTI that "rating action will not have any significant impact on our overseas borrowing plan".SBI plans to raise $1-2 billion via bonds from overseas market over period of next 3-4 months, he added.Fitch also said the banks continue to have reasonable customer deposit base, domestic franchises and adequate capital.The non-banking financial entities, meanwhile, lack the funding advantage, which puts them more at risk during times of increased market volatility, it said.Fitch also said sovereign support for both the large banks and 'policy-type institutions' is expected to remain strong, with the former benefiting from their large share of system assets and deposits and the latter from their association with the government.Earlier this week, Fitch lowered India's credit rating outlook to negative, citing corruption, inadequate reforms, high inflation and slow growth.India faces an "awkward combination" of slow growth and elevated inflation, Fitch had said, adding that the country "also faces structural challenges surrounding its investment climate in the form of corruption and inadequate economic reforms".Standard and Poor's (S&P) had in April lowered India's rating outlook to negative from stable. It also warned on June 11 that the country may be the first in the BRIC grouping to falter and its sovereign credit rating may slip below investment grade.
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The Government of India has been grappling with the issue of tracking unreported income, rightfully belonging to India, but held overseas. The last two years have witnessed a spate of information exchange agreements being signed off by India with various sovereign states. Finance Act 2012 mandated return filing for residents having assets or signing authority in any account outside India, who, otherwise may not be required to file an India tax return. Towards this direction, for detecting unreported income, Indian tax authorities have modified the tax return forms to capture information on assets and financial interests held overseas. Consequently, resident individuals would have to provide details of overseas bank account together with the peak balance during the year, details of bank accounts wherein they are signatories in their official capacity, immovable property/other assets held outside India with investment cost, financial interest in an overseas entity,etc.Asset reporting requirement is applicable only for ordinarily resident tax payers and the details are to be disclosed only by way of an electronic tax return. Further, It may be interesting to note that the Finance Act 2012 has also enhanced the time limit available to the tax authorities for reopening a tax case, from 6 years to 16 years in case if there are any income on overseas assets that had escaped Indian taxation. The disclosure requirements will provide firsthand information to Government of India on details of overseas asset held by Indian residents.India is not the only country to seek these details from its resident tax payers. With US in the lead, similar regulations are in vogue in Japan, Italy, Ireland, Korea, Canada, Brazil, Israel and Kazakhstan. However, many of these countries have well-defined rules clarifying the assets that are to be disclosed, and applicability.Further, the regulations therein also prescribe minimum threshold exemption limits for disclosure.For example – in the USA, specified individuals must report interests in specified foreign financial assets that have an aggregate value in excess of $50,000. In the case of Italy, the requirement for reporting will arise only when the aggregate value exceeds €10,000.For a law abiding resident, this new reporting requirement in India, will only remind his/her responsibility to include income (if any) earned from these overseas assets. In case of expatriates working in India, this reporting of tax filing and information disclosure to the Indian tax authorities would apply even to their resident spouses and resident family members.Given this, may be its time for India to consider joint filing of tax returns, which will minimize the compliance costs and time.(Sudhakar Sethuraman is Senior Manager, Deloitte Haskins & Sells)
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