Pledged share sale pulls down Unitech promoter holding

Pledged share sale pulls down Unitech promoter holding
The Business Standard, January 29, 2009, p3

BS REPORTER Mumbai, 28 January

Promoter holding in Unitech, the nation’s second-largest property developer, has dropped by 7 per cent since their September disclosure after lenders sold the shares pledged with them, according to analysts.

The promoter holding in Unitech has fallen to 67.2 per cent in the December quarter compared with 74.3 per cent in the quarter ended September 30, according to the shareholding pattern disclosed by the company on the website of the National Stock Exchange.

The Sanjay Chandra-led group’s attempt to raise money to repay dues had forced the promoters to pledge shares with lenders, who, in turn, sold the shares to recover their loans. The promoters are yet to disclose the total extent of pledged shares to stock exchanges even though market regulator Securities and Exchange Board of India (Sebi) has advised companies to make such disclosures to enhance transparency.

However, Unitech sources maintain that the company is not obliged to disclose the same as the Sebi directive requires an amendment to the listing agreement of stock exchanges. Only last month, IFCI and Sicom had confirmed selling pledged shares of Unitech. The lenders did not assign any reason for the sale and neither did the company comment on the same.

Unitech has also applied to FIPB to raise $1 billion by selling shares to overseas investors. A few analysts view the move as a positive development since it will help the company lower its debt to equity ratio.

“We view any additional equity raising either at the parent or SPV level as a positive development as it will aid in getting consolidated gearing down to manageable levels,” JP Morgan said in a recent report.

Adani plans to merge SEZs

Adani plans to merge SEZs
The Business Standard, January 29, 2009, p1

RITUPARNA BHUYAN & MAULIK PATHAK New Delhi/Ahmedabad, 28 January

For the first time since its inception in 2006, the Board of Approval on special economic zones (SEZs) in its next meeting in March will take up a proposal from adeveloper to merge these tax-free industrial enclaves for exports. The Adani group has sought the board’s approval to merge its three SEZs at Mundra in Gujarat. The merger will result in lesser expenses on infrastructure, utilities and administration.

Faced with a liquidity crunch, other developers too are expected to come to the board with a similar proposal. Reliance Industries-promoted Navi Mumbai SEZ Pvt Ltd is also planning to merge its notified zones in the Navi Mumbai area. “We were given five different land parcels; hence, we had to notify them separately," said a company source. An RIL spokesperson declined to comment.

The three adjacent Adani SEZs are situated near the Mundra Port which too has been promoted by the group. While two of these are multi-product zones, the third is apower SEZ. The combined area of the three SEZs is well over 6,000 hectares.

“The Board will discuss the proposal in its next meeting. Points that would come up for discussions include how to treat the processing and non-processing zones within the SEZs,” said a government official in the know.

According to SEZ rules, each zone needs to have a separate processing area for factories and units, as well as a non-processing area for houses, schools, hospitals and shopping arcades.

The three SEZs were notified separately as the Adani group bought the land in separate tranches. Moreover, a public utility road is present between the two multi-product zones. "There was a public utility road leading to an old port of Gujarat Maritime Board due to which there was aproblem of contiguity. Hence we had to apply for notification for two different SEZs," said an Adani group executive.

Indian FIs Pitch for Auditor Rotation

Indian FIs Pitch for Auditor Rotation
The Economic Times, January 29, 2009, p1

Abhinaba Das & Dev Chatterjee, ET Bureau

MUMBAI: Weeks after the Satyam saga exposed glaring lapses in auditing practices, Indian institutional investors are seeking a rotation of auditors to ensure that auditors don’t act in “collusion” with the company promoters.

The biggest local investor, Life Insurance Corporation, and the state-owned reinsurance firm, General Insurance Corporation, are asking companies, where they have significant stakes, to change their statutory auditors every three years to plug possible loopholes in the audit process. A directive to this effect is being sent out to the companies concerned.

“We are hopeful that rotation of auditors will help in preventing audit scams. The Satyam fiasco has been a big learning experience for all of us and we feel it’s time that companies change auditors periodically,” a senior insurance official told ET.

Price Waterhouse, the audit arm of PricewaterhouseCoopers, has come under the scanner after Satyam Computer Services promoter B Ramalinga Raju admitted to fudging the company’s accounts for several years. Price Waterhouse, which was the auditor for Satyam, has already sacked its two auditors S Gopalakrishnan and Srinivas Talluri, who are now in a Hyderabad jail, for signing the annual accounts which were based on forged documents. Price Waterhouse has also suspended the two partners.

With institutional investors making their stand clear, pressure will now mount on the Institute of Chartered Accountants of India (ICAI), the self-regulatory body for practising chartered accountants, to come out with guidelines to make rotation of auditors mandatory. At present, only banks are required to rotate auditors, appointed from among RBI-empanelled list of audit firms.

The official said many Indian companies retain their auditors for years, which results in “collusion” between the promoters and the bookkeepers.

Investor confidence in auditors has hit an all-time low following apprehensions that many accounting firms don’t do proper due diligence before vetting their clients’ financials. India Inc has been debating the issue of rotation of auditors for quite some time.

“Two years ago, there was a plan to effect rotation of auditors. But no action was taken,” a former ICAI office-bearer told ET, asking not to be quoted. Several calls made to ICAI president Ved Jain went unanswered.

Kamal Nath at Davos: India story is intact

Kamal Nath at Davos: India story is intact
The Financial Express, January 29, 2009, Page 1

Economy Bureau
New Delhi, Jan 28

On Day One at Davos, CEOs quizzed Indian policymakers on Satyam, exchanged notes on the impact of the global economic downturn summed up by a report released by PricewaterhouseCoopers, while the consulting firm’s global CEO winged his way to India to assess the fallout from the IT firm’s case on its operations in the country.

The head of the Indian delegation, commerce & industry minister Kamal Nath, said the India story was far more broad-based than evident from the Satyam affair. He recalled the performance of the economy over the past decade to point out the huge investments from the US and Europe. Parrying questions on the Satyam scam, Nath said investors were not looking at the episode as a red flag. He said some 60% of Fortune 500 companies are invested in India due to the confidence they have in the country.

Nath also fielded queries about the World Bank ban on Wipro, the weakening of the country’s GDP growth and a possible pullout by FIIs. He said the ban was the outcome of a World Bank employee buying Wipro shares and not any wrongdoing by the IT firm. The minister insisted that India would not be hit as badly as other nations by the financial crisis.

In an interview with BBC Hardtalk, he said, “India’s growth story is based on domestic demand. It is not based on the export market entirely. We can continue to keep our domestic demand-driven growth.” On FIIs pulling out $13.5 billion from Indian stocks in 2008, Nath said it was “not because of India’s fundamentals or because India was no more attractive”.

“(The pullout) is a tribute to the Indian financial governance sector that when they needed cash, the best way they could raise that cash was by selling Indian securities, not with a hit, but with a profit,” he said. Nath said the UPA government would, in the next couple of months, kick-start a $4-billion stimulus package for the infrastructure sector.

Meanwhile, to tackle the crisis at audit arm Price Waterhouse, whose India assurance leader Thoma Mathew stepped down and two of its partners were suspended in connection with the Rs 7,800-crore fraud, PricewaterhouseCoopers global CEO Samuel DiPiazza flew to India from Davos, where he was to attend the World Economic Forum.

The overall mood at the Swiss ski resort was one of gloom. Of the 1,100 CEOs polled by the PwC annual survey, only a fifth were confident that their firm’s revenue would show a growth in the next 12 months. This confidence level was the lowest in the seven-year-old survey. In a similar poll a year ago, half the polled CEOs were confident of revenue growth. A majority of CEOs this year said they expect some recovery only over the next three years.

RBI holds back rate cut

RBI holds back rate cut
HT Business, January 28, 2009, page 1

HT Correspondent, Mumbai, January 27: While the overall inflation number looks comfortable, the Reserve Bank of India fought shy of cutting benchmark policy interest rates further on Tuesday because the prices of sensitive food items are still not under control.

The RBI is worried about the increase in prices of primary articles, which is still in double digits, though the overall wholesale price-based inflation has dropped to 5.6 per cent from 13 per cent in August.

“In view of the divergent movement of various price indices and their components, and overall increase in global economic uncertainties, an assessment of underlying inflation for policy purposes becomes inherently complex,” said RBI governor Duvvuri Subbarao after he unveiled the third quarter policy review of the monetary policy.

“Given the enormity of the economic situation, the need is for systematic, calibrated and continuous rate cut signals,” said Abheek Barua, Chief Economist at HDFC Bank. “The RBI is being reactive and wants to respond to crisis and eventualities.”

Tushar Poddar, Economist at Goldman Sachs, echoed Barua’s views. “We think that more immediate action is necessary given the long lags with which monetary policy influences lending rates and overall activity, rather than wait for activity to deteriorate further,” Poddar said.

The current economic crisis is about growth and liquidity and going by the aggressive rate cuts since September 2008, inflation, or one component of it, should no longer be a concern.

“We think that the WPI (wholesale price indeed) and CPI (consumer price index) based inflation will fall significantly going forward and the RBI needs to take account of this. We still expect rate cuts before the end of 2008-09,” Goldman’s Poddar said.

The RBI has lowered its WPI target for end-March 2009 to 3 per cent from 7 per cent and cut GDP growth forecast for 2008-09 to 7 per cent, with a downward bias, from 7.50-8.0 per cent earlier.

India is suffering three shocks’

India is suffering three shocks’
HT Business, January 28, 2009, page 1

Amid expectations of continued monetary policy easing, the RBI Governor, D Subbarao on Tuesday kept all rates unchanged as he reviewed the monetary policy. The forecast for growth of the Indian economy in 2008-09 has been lowered to 7 per cent, with downward risks, from 7.50-8.0 per cent.

Subbarao’s views on what lies ahead:

How grave is the economic downturn globally and domestically?

This third quarter review of the monetary policy of the Reserve Bank is set in the context of a deteriorating global situation and heightened uncertainty about the global financial sector. The IMF, which puts out numbers for global growth, predicted a 2009 global growth of 3 per cent in October 2008, it was 2.2 per cent in November 2008, and I believe another number is going to come out day after tomorrow and there are some indications that could be substantially lower than the last one. That gives an indication of the velocity and the gravity of the downturn.

How is India affected?

India too has been affected in three ways—first is the exit of foreign equity that resulted in capital flow reversals and that put pressure on the exchange. Secondly through drying up of overseas bank credits for both Indian corporates and Indian banks, which shifted credit demand from external sources to the domestic ones. Lastly, exports were hit because of the deceleration of the global economy.

Have you taken any new initiative to help the economy?

Apart from the various conventional measures such as adjusting CRR, repo and reverse repo rates and some unconventional methods such as dollar swap facility for banks, we have introduced a new measure in consultation with the government of a special purpose vehicle for non-banking finance companies to the amount of Rs 25,000 crore. The liquidity situation has improved significantly following these measures taken by the RBI since September 2008.

Has RBI taken any measures to get banks to reduce their lending rates to the extent of the policy rate cuts?

Many banks have reduced their lending rates and some are yet to follow suit. The policy leaves further scope for interest rates reduction by the banks. There is a view that bank credit has not expanded or is decelerating. But if you look at the numbers for the first week of January, you can note that bank credit has expanded slightly faster than at this time last year when the number was 22 per cent. On January 2 2009, the year-on-year growth figure stood at 23.9 per cent.

Haryana to develop two green cities

Haryana to develop two green cities
The Financial Express, January 28, 2009, Page 11

Preeti Parashar Chandigarh, Jan 27

There’s good news for the residents of Delhi suburbs Gurgaon and Faridabad—they who will witness the transition of their cities into green/solar cities within the next five years.

The state of Haryana has got in-principle approval to develop Gurgaon as a solar city by using renewable energy sources for power generation. The proposal for Faridabad has also been forwarded to the ministry of new and renewable energy for approval. The step is being taken in the wake of rising electricity demand—which has gone up by 15% over the last couple of years—in the major cities of the state. The ministry has already announced to spend close to Rs 30 crore (Rs 50 lakh per city) for development of 60 solar/green cities pan India during the eleventh Plan.

The government scheme is a step forward towards reducing the green house gas emissions and promoting renewable energy in the urban areas. As per the latest UN report one million people are moving to urban areas each week. It is estimated that around two-thirds of the world population will be living in cities by 2050. Cities like London, New York, Tokyo have achieved major reduction in carbon emissions by shifting to renewable energy. Now India is toeing the line by initiating the solar cities programme.

The ministry of new and renewable energy has granted in-principle approval to 15 other cities also to be developed into solar cities. These include Agra, Muradabad, Rajkot, Ganganagar, Nagpur, among others. A senior official of the Haryana renewable energy department told FE that the scheme would apply to cities with population between 5 lakh-50 lakh. “We are in the process of hiring a consultant to prepare the master plan for these cities. It is expected that the master plan will be ready within the next three months. The cities will be turned into green cities within five years. The master plan will gauge the total and sector wise demand for energy and supply for the next 10 years,” he said.

The master plan will set a goal of minimum 10% reduction in the projected total demand of conventional energy at the end of five years, which can be achieved through a combination of energy efficiency measures and enhancing supply from renewable energy sources.

'There's scope for banks to cut rates'

'There's scope for banks to cut rates'
The Economic Times, January 28, 2009, Page 17

With no certainty on when the worst of the crisis will be behind us. For now, the central bank is maintaining a flexible stance. The governor D Subbarao, while refusing to take credit for the decline in inflation, is sticking to his objective of making money available at reasonable price. In a media interaction, the governor speaks about why he does not fear deflation despite the possibility of the wholesale price index moving into the negative territory.

What are the objectives of the latest monetary policy?

The current monetary policy review is set in times of increasing uncertainty, where IMF has been continuously bringing down its estimates for the global GDP. RBI has been mainly working with three principal objectives - ample rupee liquidity, comfortable dollar liquidity and monetary policy aimed at continued flow of credit to the economy. Till date, we have injected, or at least made available, more than Rs 4 lakh crore of liquidity through various measures.

But not all banks are cutting rates?

Transmission of monetary policy in the money and GSec markets has been effective, but the same in the credit market has been subdued. Most banks have reduced lending and deposit rates, but some have not. The latest RBI stance leaves a lot of scope for banks to adjust their lending rates, even for those that changed rates recently.

How badly is India affected in the global slowdown? Has it hurt bank credit?

Globalisation is a double edged sword. Although it has often helped India, the impact on the real and financial sector is mainly due to globalisation. India is much more integrated today than ten years ago, at the time of the Asian financial crisis. There is a view that bank credit is decelerating. But non-food credit has expanded faster (23.9%) than the same period last year (22%). So this view is not all that correct, but one must not exaggerate this piece of information. However, there has been a reduction in non-bank resources to commercial sector. Urban consumption is likely to fall from hereon, but rural consumption will hold up because there is no wealth effect here.

Is RBI pleased about inflation? Are inflation worries behind us?

Not withstanding the decline in the wholesale price index, we must note that inflation of primary articles is still in double digits. Inflation projection and inflation estimation is not just about looking at a WPI number. We look at CPI and inflation expectations too. However, the stance in the last few months has shifted from inflation to growth and priority has been to adjust moderation in growth.

Let me repeat, we’ve not conquered inflation once and for all. Today we were having a meeting with bankers and one of them suggested it’s disturbing that inflation is coming down so fast. If it’s coming down so fast it is not because of structural reasons, but because of many other factors over which we have no control. We will continue to have concerns about inflation going forward. There is a possibility that there will negative WPI inflation too. But I do not see a prolonged deflation as in other developed markets or structural deflation. It may only be more of a statistic. Groucho Marx once said – never make a forecast, especially about the future. So we do not want to make any forecasts, we’ve learnt our lessons from the past.

Industry unhappy with RBI decision

Industry unhappy with RBI decision
The Economic Times, January 28, 2009, Page 19

Our Bureau NEW DELHI

INDIA Inc has expressed disappointment over the RBI’s move to maintain key policy rates in its quarterly monetary policy review. Captains of industry and chambers have stated the central bank should have brought down rates by at least another 100 basis points to reverse the process of slowdown.

Inflation is already down to around 5%, so the reverse repo rate at which it absorbs cash from the system should be slashed to 1%,” TVS managing director Venu Srinivasan said. “Otherwise, banks will find it more profitable to park their money with RBI, rather than lend,” he added.

Industry body CII said: “Given the fact that inflation is correcting more rapidly than expected and industry and the economy as a whole is facing a slowdown, the RBI could have used this opportunity to cut key interest rates further.” The chamber said there’s still no sign of reversal in the fortunes of the manufacturing sector. “This might have an impact on employment, unless fresh measures are taken to offset the decline in domestic demand. Credit availability for the small scale sector remains a major concern,” CII added.

Ficci said RBI has held back its activism in further pruning the repo and reverse repo rates. “By RBI’s own admission, inflation is expected to moderate to 3% by March this year, this was clearly a window of opportunity.” It urged the RBI to give a further signal to banks which still remain risk-averse in lending to corporates. “Demand creation and liquidity are still an issue, and will remain so until rates are further moderated,” said Assocham president Sajjan Jindal.

Subbarao reserves ammunition

Subbarao reserves ammunition
The Hindu Business Line, January 28, 2009, page 8

Third Quarter Review of Monetary Policy 2008-09.
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The RBI has taken the right decision not to make any changes in the key policy rates, since what has been done in the last three months is substantial and it takes time for the effects to be felt, says A. SESHAN.
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The Reserve Bank of India (RBI) has preferred not to make any changes in the key policy rates. This is an appropriate stand since what has been done in the last three months is substantial and it takes time for the effects to be felt before further measures are initiated.

The growth of Gross Domestic Product (GDP) in 2008-09 is now brought down to 7 per cent with a downward bias. Considering that it was 7.8 per cent in the first half of 2008-09, it will have to be 6.28 per cent in the second half. This appears doubtful going by the recent statistics on industrial production and exports.

The RBI acknowledges that it too is in a bind when it says that monetary ammunition has been nearly exhausted in many countries.

The indicative growth projection in the total flow of credit to the commercial sector from all sources by the end of the year is raised from 20 per cent to 24 per cent. Going by the trend so far, it is a moot point whether much can be achieved in the remaining weeks.

INFLATION
The RBI’s prediction of inflation at less than 3 per cent by the end of the year is somewhat optimistic. A further reduction can be achieved if the government cuts the administered prices of petroleum products such as diesel. But how much would bringing down the prices of essentials, even after reckoning with their inter-industry effects, help?

The RBI is, of course, cognisant of the double-digit inflation revealed by various versions of the Consumer Price Index (CPI). Here the hope is that the reduction in input prices will bring down commodity prices and the decline in Wholesale Price Index (WPI) will have a lagged effect on the CPI.

In the first place, so far as agriculture is concerned, there is no reduction in the price of a major input, namely fertilisers. Second, whether WPI influences CPI or vice-versa or it is a mutual two-way relationship is yet to be conclusively determined despite the battery of causality tests employed by econometricians for the purpose.

It is surprising that experts of the RBI have fallen for the naive and meaningless reference to the ‘base effect’ of the previous year. Does one fight inflation with the help of such a concept?

It would mean that the high inflation observed a few months ago was a blessing in disguise as it would have a favourable ‘base effect’ next year!

This ‘effect’ is an arithmetical explanation, not an economic one. The total amount of additional liquidity released during the recent period is Rs 4,28,000 crore, including the money unwound (Rs 40,000 crore) through a reduction in the Statutory Liquidity Ratio. With a fall in growth rate and money supply target increasing from 16.5 per cent to 19 per cent, where will all the additional funds go except to raise nominal incomes through inflation?

BACKGROUND DOCUMENT
The document Macroeconomic and Monetary Developments — Third Quarter Review 2008-09 provides an authoritative background for an assessment of the latest policy stance of the Bank. There are two outstanding features that deserve to be mentioned.

Besides being transparent, objective and plain-speaking, it has reference to money multiplier in the context of the changes in cash reserve ratio. This is a good beginning. In future, its actual value can be compared with the theoretical one and variations thereof can be explained.

There is, however, a need to incorporate a reference to the other equally famous income multiplier, associated with Keynes. It is the multiple impact of the initial expenditure on the growth of the GDP.

In fact, the stimulus packages announced by the Government in the area of spending and tax cuts are posited on this multiplier in combating the decline in the growth rate of the economy. So it is imperative to know its value to have some idea about the expected result of the measures.

Valerie Ramey finds from historical US data that the multiplier for public spending is not large in that country: $1 in public spending raises GDP by only $1.4 (Identifying Government Spending Shocks: It’s all in the timing, University of California, San Diego, June 2008) Hence, the expected large-size impact on the US economy due to the massive stimulus packages of the Federal Government has been questioned. Second, there is a detailed description of liquidity in the economy beyond what was covered in the earlier documents.

Incidentally, the Government appointed a committee under the leadership of the Finance Secretary to examine the liquidity problem that prevailed a few months ago. The Report has not yet been published.

The current thinking is that there is little fiscal space left for further stimuli and it is the job of the monetary authorities to take over. This is contrary to conventional Keynesian thinking.

The central bank can flood the economy and reduce rates drastically. But if the environment and expectations are not favourable for businessmen to demand additional credit, the extra liquidity makes a round trip and ends in reverse repo operations with the RBI, as is happening now.

STATE FINANCES
Another point is the role of the States in tackling the present crisis for which not much attention has been given either by the authorities or observers.

A few days ago, the finances of State governments were reported to have made a remarkable improvement with a few exceptions, as brought out by an excellent analysis of the RBI staff (State Finances — A Study of Budgets of 2008-09). It indicated the scope for stimulus packages of State governments.

However, the background document of the RBI puts a damper on this welcome development. It says that the revenue surpluses of States envisaged in their budgets may not materialise due to subsequent developments.

(The author is a former officer-in-charge of the Department of Economic Analysis and Policy, RBI. blfeedback@thehindu.co.in)