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DECEMBER 2011
On 4 October 2011 the credit rating of the State Bank of India was
downgraded by the Global ratings firm Moody’s. The ratings
agency took SBI’s grading to D+ from C-.
SBI had a shortage of capital to cushion bad loans or
contingencies and thus started weakening asset quality. High
interest rates in a slowing economy results in shorthand for loans
that do not yield interest. This led Moody’s to adopt a negative
view on SBI’s creditworthiness. As a result, the borrowing
companies suffer. Rating downgrades usually are caution signals
to bond investors. The Banking customers do not have encounter
risk.
After the downgrade, SBI shares slipped 4% to Rs 1,787 on the
Bombay Stock Exchange and the Sensex dropped 1.77% or 302
points to 15,685. As of June 2011, the Capital Adequacy Ratio
(CAR) of the SBI stood at 11.6 %. CAR is a measure of the backup
money a bank has to withstand loan uncertainties. Tier-I
capital stood at 7.6 % which was a little below the 8 % desired by
the government. Tier-I capital broadly refers to shareholder
equity.
ECONOMY COVERAGE
Moody's Downgrades SBI Credit Ratings Godrej Properties Enters Into
Agreement With Godrej & Boyce
100% FDI for New Pharma
Ventures to Continue
India on 10 October 2011 decided to continue with 100 percent
Foreign Direct Investment (FDI) for new ventures in the
pharmaceutical sector. The decision was taken at a high-level
meeting chaired by Prime Minister Manmohan Singh to discuss
the FDI policy in drugs and pharmaceutical sector held in New
Delhi. The move will facilitate addition of manufacturing
capacities, technology acquisition and development of the
pharmaceutical sector in the country.
However, in case of existing ventures in the pharmaceutical sector,
FDI will be allowed for a period of six months after approval from
the Foreign Investment Promotion Board (FIPB). It was also
decided that the Competition Commission of India (CCI) will be
strengthened for effective oversight on mergers and acquisitions
to ensure that there is a balance between public health concerns
and attracting FDI in the pharmaceutical sector.
To Arrest Deficit Finance Ministry Ups
Tax mop-up Target by Rs 53000 cr
The finance ministry in October 2011 revised the Budget estimate
of direct tax collection upwards by Rs 53000 crore to Rs 5.85 lakh
crore. The higher target marked an increase of 31% over last
year’s collection of Rs 4.46 lakh crore. The Budget estimate of
direct tax collection was revised upwards to bridge the shortfall
that might occur due to reduction in customs duty on crude oil
to offset price rise.
The growth in net direct tax collection in the April-September
2011 period was only 7% or Rs 1.94 lakh crore. But the overall
gross collection rose by 23% to Rs 2.57 lakh crore. The collection
was 36% of the budget estimates of Rs 5.32 lakh crore for 2011-
12.
CBDT officials opined that the government will have to move
fast on increasing the strength of the department. There are 1,200
posts of additional commissioners, considered the backbone of
tax collection, of which there are at least 600 vacancies.
CBDT created several new investigative departments, including
a Directorate of Criminal Investigation with the mandate of
inducting a marine and armed unit to tackle white-collar crimes
and deal with tax evaders even on foreign shores. CBDT’s request
to enhance the manpower was personally vetted by finance
minister Pranab Mukherjee and the file was moved to DoPT for
final approval.
Trade Policy:
‘Niryat Bandhu’ Concept Introduced
The Director General of Foreign Trade (DGFT) on 13 October
2011 announced introduction of a new Niryat Bandhu scheme
for international business mentoring for young turks in
international business enterprises. The officer (Niryat Bandhu)
would function in the mentoring’ arena and would be a
handholding experiment for the young turks in international
business enterprises. Under the scheme, officers of DGFT will
be investing time and knowledge to mentor the interested
individuals who want to conduct the business in a legal way.
The DGFT also announced that it became India’s first digital
signature enabled department. According to the new Foreign
Trade Policy (FTP) unveiled, a higher level of encrypted 2048 bit
Digital Signature has been introduced. Digital certificate provides
a high level of security for online communication such that only
intended recipient can read it. It provides authentication, privacy,
non-repudiation and integrity in the virtual world.
Also, import of radioimmunoassay kits was classified in the
restricted category as per ITC HS-Import Schedule. Since the
import item is intended for the diagnosis of disease/disorders in
humans and animals, the import policy regime for this item was
liberalised to free subject to prior permission of Atomic Energy
Regulatory Board.
The procedure for transfer or sale of imported firearms was also
simplified. For sale/transfer of imported firearms prior permission
from DGFT is not required after 10 years of import. Further, this
condition of 10 years would not apply if importer attains 60 years
of age. Local police licensing authorities or District Magistrates
can give permission of sale/ transfer directly. Even for Shooters
category, sale/transfer of imported weapons would not require
approval from DGFT.
For the first time in the history of foreign trade formulation, the
draft text for amendment of HBP v1 was uploaded on the website
of DGFT seeking suggestions on the draft.
Godrej Properties (GPL) announced that it has entered into an
agreement with Godrej & Boyce (G&B) whereby GPL will act as
development manager and be responsible for the
conceptualisation, sales, designs and marketing of all future
development on the G&B-owned land in Vikhroli in suburban
Mumbai. Godrej Properties is the real estate development arm of
the Godrej Group.
GPL will get a fee equal to 10 per cent of the total revenue
generated from the development for its services. The cost for
design and construction of the development will be incurred by
Godrej & Boyce in its role as owner-developer whereas the cost
for sales and marketing will be borne by Godrej Properties in its
role as development manager.
The project will be constructed in phases and the details on each
phase will be announced before the launch of the individual
phase. The development will have a mixed-use character. The
first project under this agreement will begin immediately with the
launch of Godrej Platinum.
Despite Protests
Rs 500 & Rs 1000 Notes to Stay
The Indian government in October 2011 decided not to
discontinue circulation of higher denomination notes of Rs 500
and Rs 1000 despite demands from civil society groups that big
currency notes made it easier for those with black money to
stash their cash and were the primary causes of inflation.
Of the total Rs 9.70 lakh crore worth currency notes in circulation
as on 30 June 2011, more than 80% are in the denomination of Rs
500 and Rs 1000. The total value of notes of Rs 2, 5, 10, 50 and 100
in circulation is less than Rs 2 lakh crore.
The demand to curb higher denomination notes was with an
objective to check the menace of unaccounted money, stop fake
currency circulation and curb anti-national and terrorists using
these counterfeit currency to destabilize the economy.
Civil society groups demanding withdrawal of higher
denomination notes pointed out that even US and European
countries where the per capita income is much higher than India’s,
the denomination used is much smaller in comparison. The largest
denomination note in the US is of $100.
Civil society groups’ demand had the support from revenue
intelligence agencies which have been grappling with the menace
of counterfeiting.
A recent report prepared by the Directorate of Revenue
Intelligence (DRI) in association with the Intelligence Bureau,
RAW and CBI had pointed out that fake Indian currency notes
in circulation in India could be as high as worth Rs 6000 crore
and it seriously undermined the credibility of the rupee.
Sebi Clears Insurance IPO Norms
Capital market regulator SEBI approved share sale guidelines for
insurance firms. The norms once cleared by the government will
ensure the entry of the insurance industry to revive the dormant
primary market as the novelty value of the sector could attract
more investors.
IRDA had earlier specified that insurers that have completed 10
years of operations are eligible to go for share sale. Prior to filing
of the draft document for making public offer with SEBI, the insurer
is required to take a formal approval from IRDA.
SEBI withdrew a major irritant for life insurance companies waiting
to hit the capital market with initial public offers. While clearing
IPO guidelines of life insurance companies, the regulator removed
the three-year profitability clause that is applicable for all
companies as a precondition for tapping the capital markets.
However, insurance companies will have to go for additional
disclosures as required by the Insurance Regulatory Development
Authority (IRDA) over and above the disclosure norms set by
SEBI. The move to remove the three-year profitability clause is
expected to bring some relief to the majority of life insurance
companies, as most of them are yet to underwrite any profits.
According to the draft guidelines, insurance companies, which
have completed 10 years of operations, will be allowed to tap the
capital market and the valuation would have to be based on the
embedded value to be calculated by a method designed by the
Institute of Actuaries of India.
Insurers planning IPOs will have to disclose their economic capital
as well as the embedded value to the regulator.
They have to first seek formal approval from IRDA and then the
final approval from SEBI. Typically, under the disclosure norms,
insurance companies will have to disclose their balance sheet,
premiums, commission expenses and operating expenses on a
quarterly basis.
Apart from this the guidelines are expected to follow the usual
norms, like individuals holding more than 10 per cent stake would
be considered as promoters and the company will have to maintain
a solvency ratio of 1.5.
IRDA will not have any mandate on the extent of dilution, and it is
up to individual companies to decide on the size of the issue.
SEBI guidelines mandate 25 per cent of the shares of a listed
company be retained by the public.
The IPO guidelines are considered important as a host of private
life insurance companies, such as Reliance Life, HDFC Life and
ICICI Prudential Life have expressed interest in tapping the capital
market.
Services Sector in Contraction Mode
Survey released on 5 October 2011 showed that activity in the
services sector shrank and overall economic activity was found
to be stagnating. Employment levels fell for the second successive
month in September 2011.
HSBC Purchasing Managers Index, which is based on a survey
of 350 private sector executives showed that the seasonally
adjusted Service Sector Business Activity Index fell to 49.8 from
53.8 in August2011. Any reading of less than 50 indicates
contraction, while economic activity is seen to be growing if the
index is over 50. This is the first time since April 2009 that the
services sector, that accounts for more than half the Indian
economy slipped into negative terrain.
The decline in services sector activity was attributed to lower
demand for offshoring and IT and IT-enabled services from the
US and Europe, where several economies are grappling with debt
problems. The decline in this sectorimpacted financial services
as banking activity slowed down on account of higher interest
rates and investors are wary of parking their funds in stock
markets.
Due to the sharper-than-expected global slowdown and the
impact of high interest rates on the domestic economy, the overall
growth was observed to be slowing down at a faster clip than
anticipated earlier.
The overall trend is in line with expectations that the Indian
economy will grow at less than 8% during 2011-12. The economy
expanded 8.5% in 2010 prompting the government to predict 9%
growth in 2011. However, as the global economic situation
deteriorated and higher interest rates slowed down the growth
momentum the government lowered its forecasts.
The survey also showed that employment fell as awell increasing
worries for policymakers, who want rapid economic growth to
take care of the growing population that is joining the workforce.
Home Loan Burden to Rise by Rs 6000 cr
According to a report by Crisil, increase in equated monthly
installments (EMIs) due to rising interest rates and reset of teaser
loans is expected to put additional annual burden of about Rs
6000 crore on home loan borrowers. Higher EMIs and slowdown
in economic growth is also likely to increase bad loans for lenders.
To check inflationary pressures, RBI hiked key policy rates 12
times in the past 18 months, leading to higher interest burden for
home loan borrowers. The reference floating rate for the industry
increased by 200-250 bps during the 18 month period, which
translates into an average increase of 15% in EMIs. banks and
housing finance companies reset their benchmark rates. However
the increase has not yet affected customers who opted for teaser
loan schemes launched in early 2009 to stimulate dwindling home
demand. For a teaser scheme customer, the rates are fixed for the
initial 2-3 years, and subsequently get linked to the prevailing
market rates.
According to the Crisil report, a large number of borrowers who
are on teaser loans will get hit with a sudden jump in rates when
the teaser rates reset to market rates. This shift is expected to
take place from April 2012. The difference between the teaser
rate and the reset rate is likely to be as high as 300-350 basis
points (bps).
The report highlighted that at the end of June 2011 quarter the
asset quality of industry players like HDFC, LICHFL and DHFL
deteriorated by 10-40 bps on a quarteron-quarter basis.
The report however mentioned on the positive side that yields
for financiers will improve in 2012-13 as teaser loans availed in
2009-10 get reset to market rates. The yields for a teaser loan
customer is expected to increase by 300-350 bps once they are
reset to market rates. This will have a net positive impact of
around 30 bps on the net profit margins of housing finance players
in 2012-13.
The impact of rising interest rates is best reflected on the EMI of
a borrower with a 15-year home loan for Rs 15 lakh. With the
current mortgage rates hovering around the 11%, the borrower’s
EMI would have risen by 15% from Rs 14771 to Rs 17049. If rates
were to go up to 13%, his EMI will rise to Rs 18979.
Economists who met RBI governor D Subbarao on 11 October
2011 suggested that central bank continue with its rate increases
as inflation continues to be high. However the bankers and
corporates have asked the central bank to halt rate hikes. While
bankers have pointed out to a moderation in demand, corporates
have highlighted the industrial slowdown as the need for
measures to revive the economy. Corporates specified that steep
inflation is owing to international factors and rate hikes will do
more harm than good to the Indian economy.
Sistema Shyam Tele Services Launched
High-Speed Net Connectivity
Sistema Shyam TeleServices on 12 October 2011 announced the
launch of High Speed Data (HSD) connectivity across the 350
km long Chennai-Bengaluru stretch of National Highway, one of
the business stretches in India. Sistema Shyam TeleServices
provides services under MTS with over 13 million wireless
subscribers.
Facebook Buys Start-Up Friend.ly
Social networking site Facebook acquired Friend.ly on 10 October
2011. Friend.ly is a social question and answer service. Friend.ly
designed an app for Facebook that helped users pose questions
to online friends.
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