Thursday, November 29, 2012

BUY OIL FIELDS or IMPORT OIl?


This question has come to fore after ONGC's overseas arm, ONGC Videsh (OVL), purchased 8.4% of the giant Kashagan oil field in Kazakhstan for $5 billion in a deal which is for the span of 25 years. Located in the north Caspian Sea, this is the world's largest oil discovery since 1968, with reserves estimated to be as high as 30 billion barrels.  Let’s look at some other major countries for comparison. China prefers acquiring assets; Japan opts buying oil, instead. India opts for both. So now lets look at both cases. With crude prices at $100 per barrel, OVL will recover the full value of its investment in a little more than six years. If prices fall, it will take longer. Thus this deal might not be good in near term. This Kashagan oil field is estimated to have very high capacity and output capacity of 3mn barrels/day. Keeping this factor it looks quite a lucrative deal in long term but, if it turns out to be a disaster similar to its $2-billion deal to buy Russia's Imperial Energy it would dent the comapny and the country very badly as OVL has exhausted all its reserves in this deal. But the Kashagan deal is unlikely to suffer the same fate because of its huge estimated capacity. One more fear was that it might be difficult to transport this oil to India but this fear is warded off as this output can be swapped with any other seller worldwide. Thus this recent buying spree may be good to secure energy sources for the country and meet its long-term production goals. The other side of discussion i.e. importing oil cannot be declined this easily. Experience shows that functional oil markets offer security, with some reserves thrown in and oil markets functioned even during the two Gulf wars. It is completely the government’s policies whether it wants to stick to importing or go for buying fields. So is it right to buy fields or import oil?


Tuesday, November 20, 2012

India Inc.'s Dilemma


The recent news regarding the latest tussle between the insurance regulator IRDA and the finance ministry shows some signs of desperation on the side of the ministry to meet the disinvestment target. The finance ministry expects to raise Rs. 30,000 crore through the sale of government stakes in state owned companies.However this target seems to be far from being achieved.
The main reason for this type of disinvestment is the rising fiscal deficit which has to be reduced if India does not want to be in trouble.

 The recent 2G auctions have also left the government concerned about meeting the target of reducing the fiscal deficit to 5.3% of India's GDP. The estimated revenues from the auction were Rs.40,000 crore however the auctions were able to raise only Rs.9,400 crore.

With this two problems in front of GoI it is obvious for them to get worried and hence they do not want to take any risks. So they have now decided to allow LIC , India's largest insurer to invest in buying stakes of listed companies up to 25% (up from 10% previously). This decision might be a bane because it might increase LIC's exposure to risk and thus investor's money might be at risk. So IRDA is opposing this.

Whether this decision is useful or like the other two trials this too will prove to be a flop for GoI is a question which is yet to be answered.

Parth Pandya
SIMSREE Finance Forum

Sunday, November 11, 2012

US Elections and India


Last Wednesday the world got a very important news - Mr. Barack Obama being re-elected as the president of the United States of America. However it is such a news that would not leave even a single country in the world unaffected. For India there were mixed feelings.

For the India IT industry this news is considered to be somewhat bad  because of the stricter visa rules that would make it difficult for Indian IT industry to send their people to the U.S. where lie the majority of its customers. 

However if we look at the global economic scenario this news is not bad at all. The world is well known by the phrase "fiscal cliff" by now. Mr. Obama is believed to take a softer stand with respect to tax reforms and reducing the fiscal spending of the U.S. thus benefiting the growth f both the U.S. and the world economy and hence the Indian economy as we will see more FIIs investing heavily in growing markets like India. By December this year the decision regarding the fiscal cliff is expected to come making things much more clear.

On the other hand India must take care that the internal policies must not act as a hindrance to the investments. There are several reforms which await the winter of the parliamentary session for their approval. So there is one more reason to wait for this December.

Parth Pandya
SIMSREE Finance Forum






Thursday, November 1, 2012

Auction - The only way of allocating Natural Resorces to Private Firms?


The article is written by Khushal Shah and Chetan Dhawan from SIMSREE in the Arthneeti Article Writing Competition (September 2012)
 
Dr Manmohan Singh is standing at a very precarious position today. The Comptroller and Auditor General of India, in his recent report, has pulled up the government for financial wrong doing due to its policy of allocating captive coal blocks to private companies without a competitive bidding procedure. Dr Singh has justified his stance by arguing that the CAG has gone wrong with its numbers and that it is the government prerogative to decide on policy regarding allocation of natural resources. Has Dr Singh erred in handing out coal blocks for free and subsequently justifying the government’s decision?

To answer this let us first look at how the allocation of natural resources started in India. The Mines and Mineral Development and Regulation Act was enacted in 1957 when we hardly had any information about the extent of our natural resources. Also, there was very limited private investment. Under such a scenario, the government promoted first-cum-first-serve scheme whereby any willing investor was given the lease and the license to extract the minerals.The reason for implementation of the scheme being that ultimately the method of allocation of natural resources including airwaves, coal, minerals, oil and gas, forest land, to name a few, should also take into account public interest which includes within its ambit the larger economic perspective and not merely financial gain. However the recent revelations by the CAG accusing the government of causing a notional loss of lakhs of crores of rupees to the national exchequer and the prima facie reports by the CBI accusing several government ministers of nepotism indicating collusion between corporates and bureaucrats call into question the feasibility of a first cum first served allocation policy for any natural resource.

            Today, we are faced with such a low level of public trust that the auction process is seen as the 'best' way to ensure adherence to transparency and openness in resource allocation and maximising revenues to the government. Even the apex court, following 2G spectrum revelations, commented that ‘If scarce natural resources were to be alienated by the state, then the ‘only’ legal method was a transparent public auction’. So why is it that an ‘auction’ is perceived to be the only best possible method?

            To answer this, let us first see how resource allocation under auctions takes place. Generally in this scheme government comes up with a ‘Base Price’, which is the minimum price at which the government expects to sell the resource. The bidders are then expected to bid above the base price based on their perceived value of the resource. The bidding goes on till only one highest bidder remains. Now the resource is allocated to the bidder at this discovered highest price.Since the entire process is transparent,chances of collusion and corruption reduce drastically, securing the best possible price for the government.Perhaps, we can take a clue from the recently conducted 3G auctions which took place by means of an online auction. The bidding went on till the highest bid was realized. The process ensured transparency during the entire process by means of specially designed secure software. Clearly, an auction is a way to determine market demand and price. But why fixate on auctions as the only way to ensure market orientation, transparency and efficiency in the allocation and pricing of natural resources in India?

While auctions could be a ‘preferred’ option since they bring about transparency and secure the best possible price, revenue enhancement cannot be the only consideration while allocating natural resources.The disposal and distribution of natural resources has to be made in accordance with the sector specific requirement of each natural resource. The method of distribution of natural resource has to take into account the nature of natural resource and economic policy underlying the effective utilisation of such resource. There are various other factors such as national inclusion, service affordability, final product pricing, rural penetration etc that have to be taken into consideration to arrive at informed and reasoned decision of the methodology of allocating natural resources.           

Apart from these there are certain problems which the government might have to overcome before it can enforce the auction policy for all natural resource.First, the Centre has to convert this policy to law by way of amending Section 11(2) of the 1957 Act to auction natural resources like minerals, which is time-consumingFor example, the government tried to amend the Act to introduce auctions for allotment of coal blocks in 2004, but has not yet finalised its modus operandi.Secondly, the past experiences of some State Government for allocating leases by competitive bidding have not been encouraging. In 1991, Odisha suddenly realised that mining gemstones by the State-owned Orissa Mining Corporation was not remunerative and decided to auction gem-rich blocks by competitive bidding through Orissa Mining Corporation.The State Government identified 12 such blocks for aquamarine and sapphire in Bolangir and Kalahandi districts for a reserve price of Rs 20 lakh. Out of 12, the State Government could auction only five blocks for Rs 22 lakh. Thirdly, the Supreme Court in its order of February 2 this year observed that while allocating natural resources through auctions, the doctrine of public interest within the framework of the Constitutional rights of the people has to be adhered to, which is not possible if the government adopts only auction route for allocation of all natural resources. For example, if we auction fish resources of the Bay of Bengal, the Japanese trawler companies may bid the highest price, but the livelihood of the east-coast fishermen will be in jeopardy. Fourthly, it is observed that the cost of buying at a high price from an auction is more often than not passed on to the final consumer. For example the recent auction of third generation airwaves did fetch the government a huge sum, but the services have not found widespread acceptance among the general public because the companies, in order to recover the bid price, had to price these services at a higher price. Compare this to the allocation of 2G spectrum. It is widely believed that while the awarding of 2G spectrum on a so-called first-come-first-served basis in 2008 may have caused massive losses to the exchequer, the consumers, nevertheless, benefited from call rates dropping due to the entry of new mobile operators and very low call rates.

Another alternative for allocation of natural resources which can be beneficial to both the government and the companies can be a royalty based mechanism. A royalty based mechanism is similar to a tax based on assessed value of a property.The royalty should be tied to the market prices, rather than a fixed amount. A royalty based mechanism would enable the government to charge royalty at the current market price, rather than at the beginning when the resources are allocated. It would ensure continuous supply of revenue to the government. Since the royalty is associated with the actual market price, it would ensure higher revenue generation for the government. The time period for revising the royalty value should not be kept very long. Although the royalty based mechanism is prevalent in India, the royalty amount is fixed and revised every three years, which is a very long period considering the fluctuations in the prices.

            Considering the diverse needs of the country, it would be very difficult to pin point on a specific policy as the best alternative, given that the main aim of the government is to bring in transparency and safeguard the resources belonging to the country. Auctions are meant to allocate scarce resources in a transparent manner. In case the government wants to deviate from market based pricing, driven by overriding public concern, then the rationale behind policy making must be clearly manifested. In the larger public interest, if prices of end products need to be kept at a threshold, then the good or service should be subsidised at the consumer end rather than at the input end. Ensuring that benefit given at the input end to corporates will be passed on to the consumer is very difficult.The best choice would be the one which would ensure sustainability, effectiveness and transparency in the utilisation of the scarce natural resources.

Sunday, October 21, 2012

Arthneeti September 2012 issue


Dear Readers,
In recent times we have seen many regulatory issues coming up in our country. Many regulatory decisions such as 2G allocation, coal blocks allocation have been questioned. These are natural resources. The Supreme Court cancelled 122 2G licenses thereby questioning the government’s allocation process. This cancellation has also affected the foreign investor sentiment thereby affecting the economy. The foreign investors are wary of investing in the country because of confusing regulatory norms. Also, coal block allocations done to many firms are under scanner after the CAG report on some wrong doings in the process.
To read further, click here

Monday, October 8, 2012

FISCUS'12


SIMSREE witnessed cynosures of the industry at FISCUS’12, the annual Financial Summit. The presence of Guest of Honour Dr. Subir Gokarn, Deputy Governor, RBI sparkled the sombre milieu along with Chief GuestMr. Ramesh Chandak Managing Director & CEO of KEC International Limited (KEC) and Keynote speaker Mr Nilesh Shah, Director Axis Direct. It was a lifetime opportunity to listen to veteran Dr. Subir Gokarn speak about “India: 6% Growth, The new Comfort Level?” He very succinctly put forward the analogy between Policy Makers and Managers while elucidating the ingredients of growth. He listed down the various macro factors that needs to be addressed for sustainable increase in growth rate. The intricate concept given by Dr Subir Gokarn was further explained in a very lucid manner by the Mr Ramesh and Mr Nilesh Shah.

Hon' Deputy Governer RBI Dr Subir Gokarn

In his addressal, Mr. Ramesh Chandak spoke about the impact of the Power sector which is one of the most critical growth drivers for a country. He started by talking about the recent major fallacies in the sector including the massive grid failure and Coalgate scam and its implications on the overall health of the country and its economy. He pointed out that in comparison with the global leaders, India stills lags far behind in the per capita power usage with a stark difference in the demand and supply. According to him, for addressing these vital issues we need an integrated energy ministry and a developed infrastructure to reduce distribution losses.
Mr. Nilesh Shah addressed students on the topic of benefits of capital market for growth of Indian economy. He emphasized the point that development of domestic capital market is the need of current economy to encourage entrepreneurship. He also said that we have a deep potential for capital market in India and it will start benefiting the economy if more people start investing in the debentures, equities, bonds, securities etc. instead of creating physical assets in terms of gold, silver and diamonds. Mr. Shah talked about the significant role that debentures would play for sustainable growth. He gave an example of how TUF i.e. Technology Upgradation Fund for textile industry played a major role in sustainable growth of the textile industry in India in the times of inflation.

What followed was one of the most engaging discussions that students of SIMSREE had ever witnessed. The panel discussion included corporate stalwarts like Mr. Gautam Patel, MD Zodius Advisors (Moderator); Mr. Ritesh Kumar Singh, GM & Group Economist Raymonds; Mr. Anay Khare MD-Corp fin-IB, Enam Securities; Mr. Sundarapandian Vishwanathan, VP Capex controlling Head, ACC; Mr. Sidharth Punshi, MD Investment Banking JPMC; Mr. Paresh Patel, Founder and MD Sandstone Capital and Mr. Manishi Raychaudhari, MD BNP Paribas Securities. Each of the panelists while talking about their area of expertise mirrored the sentiments of Dr. Gokarn. They stressed on the need to extend the reforms in retail and aviation industries to infrastructure and other major growth inducers for the economy. They spoke about how targeting untraditional markets for exports and disinvestment by the government to fund infrastructure development in the country can help the economy grow at higher rate and sustain it. The discussion and the  Question & Answer sessions that followed was carried on in a crystal clear manner that captivated the attention of novice in the field of management helping them to grasp the current trend of Indian economy.
Panel Discussion


Fiscus‘12 thus turned out to be a grand success owing to the relentless efforts of the members of the Finance Forum, the constant support and guidance of our Director, Dr. M A Khan and all others who contributed to this successful mega event.
Dr Subir Gokarn with SIMSREE Finance Forum team

Wednesday, July 11, 2012

Arthneeti, June 2012 Issue




Dear Readers,     
                                                                                           
We have witnessed a slew of depressing data about
Indian economy in the last three months. Pick any
macroeconomic data and you are bound to get a
negative feeling about economy and uncertain
future. Fitch and S&P revised India’s credit rating
outlook to negative from stable whereas Moody’s
reaffirmed credit rating outlook to stable.Future 
looks quite uncertain and direction will depend upon
supporting policies by political class.

To read further, click here

Sunday, June 10, 2012

Implications of Greece'e exit

In the month of March, there was a lifeline for economy of the Greece when countries like Germany, Finland and others agreed to make a €130 billion bailout for the country. But now when the results of the election have come up on 6th May and both the coalition parties unable to garner a majority and having a hung parliament, there are talks going on for bailout re-negotiation. Greece's euro-zone partners agreed to release only €4.2 billion ($5.5 billion) in previously agreed financing, to be paid out Thursday, holding back €1 billion at least until June. That would be paid only if Greece keeps to pledges it made to secure a bailout.
With talks reaching no resolution Wednesday, the Pasok party, which came in third in Sunday's vote, will make a last stab at building a coalition. But few expect a breakthrough and many observers say parties are positioning themselves for another election in June. "It doesn't look like there is any other solution apart from elections," one Syriza official said.
The next round is shaping up to be a showdown between Mr. Tsipras and New Democracy leader Antonis Samaras, who is expected to make the election a last stand for Greece staying in the euro bloc.
With Athens in political turmoil after a fractured result in weekend elections, and a new vote likely by June, German politicians cautioned that further aid could be withdrawn if Greece abandons austerity targets—even if that pushes the country from the bloc.
The election results have clearly showed that the public there is against austerity drives which are one of the necessary conditions for the bailout package to be given out by the EU. Thus it would be very difficult for any government to approve further cuts of €11.5 billion by June end. Thus the country is imminent to head for an economic emergency again. Technically such comments lead to only one thing- the imminent fall out of the Greece from the European Union. Such fears continue to keep European financial markets on the edge.
Implications of Greece’s exit:
Even before an exit Greece’s banks could collapse if the steady withdrawal of deposits—they are 30% below their peak, according to Credit Suisse—were to develop into an outright run. After an exit debts to foreign creditors would soar as the new drachma fell, leading to further defaults. On strict legal grounds, Greece could find itself cast out of the European Union as well as the euro area, at risk of losing access to the single market.
But the panic would not be confined to Greece (which made up just 2.3% of the euro zone by GDP in 2011). Depositors in other vulnerable economies could take fright and try to withdraw their funds from their banking systems. Even if the European Central Bank (ECB) fought this with massive liquidity support, the crisis would shake already frail banks, especially in Spain. Bond yields will jump in any country that might conceivably leave the euro once such an exit has actually happened, with the rise proportional to the risk. Bad, then, for Spain and Italy. Worse for Ireland and Portugal, which have already needed bail-outs. Last year elections in both countries produced reform-minded governments, but the economic pain they are already undergoing is intense. A referendum on the German-inspired “fiscal compact”, which will insert public-debt brakes into national laws, is due in Ireland on May 31st and many Irish may be tempted to use the occasion to vent their discontent and add to the anti-austerity movement in Europe. An Irish rejection would not prevent the treaty coming into effect, but it would relieve the Irish of any obligations under it, and mean that they would not be bailed out in future. Thus a Greek exit from the euro zone would not just be chaotic for Greece itself but would also invite questions about the status of Portugal, Ireland and others.
The Greek Government bond yields were relatively unchanged with the 10-year quoted at the price of 20-22 cents on the euro, to give a yield in the region of 22%-23% . While the Spanish and Italian bond yields continued to grow higher with Spanish bonds up nearly 0.12 percentage point at 5.915% and Italian higher 0.07 points at 5.68% according to data from Trade web.
Thus the need now is for the policymakers to look for other strategies like a credible commitment to mutualize the debts of remaining euro-zone countries, because as stated by the new French president-elect Mr. Francois Hollande that austerity is not a panacea for the problems. But it is hard to see how such a pledge could be made credible enough in the near future. There is no consensus among Europe’s elites that this is the way to go; and the political journey to that destination would rightly require parliamentary votes and referendums.

Article By:
Prathmesh Limaye
SIMSREE

Saturday, March 17, 2012

Arthneeti, March 2012 Issue

Arthneeti, March 2012 Issue

Dear Readers,                                                                                                    
March,2012 Issue

Q4 has been good so far for Indian Capital market. We have observed upward movement of Sensex.In this issue, we have covered Indian economy growth in comparison to global growth, Euro crisis austerity measures and introduction of new acronym 'CIVETS'. 
We have covered interview of  Mr. Janak Desai, Country Head -Wholesale Banking & Treasury, ING VYSYA BANK for his views on the Banking Sector, rising amount of NPAs.


Click here to download the full pdf version.

Sunday, January 29, 2012

Arthneeti Dec,2011 Issue

Dec,2011 Issue

Dear Readers,

2011 has not been the best of years for world's economy. Both developed
and developing part of globe struggled to sustain the growth.It all started
with frequent bad news from Euro Zone, followed by declining growth rate
back home. Outlook for year 2012 also seems to be uncertain.

Click here to download pdf version.

Finance Summit - FISCUS 2011

Finance Summit “FISCUS ‘11” was held on 1st October at Indian Merchants Chambers (IMC), Mumbai. FISCUS ’11 brought together students and finance stalwarts on a common platform to discuss a vital issue in the field of finance. The list of speakers included eminent personalities from the world of finance.
The Morning Session on“Financing the Corporate Needs of India Inc” was chaired by Mr. Gautam Patel, Advisor, Battery Ventures & Managing Partner, Citta Capital. The other Panelists included Mr. Manish Arora, Executive Vice President, Country Head-Product Development & Sales Effectiveness, Yes Bank, Mr. Bharat Sampat, CFO, DCB Bank, Mr. Sunil Sapre, CFO, CEAT, Mr. Vikram Gupta, CFO, Essar Shipping Corporation and Ms. Jayashree Ramaswamy, CFO, Dun & Bradstreet.


The Afternoon Session on “Developing the Indian Capital Markets”was chaired by Mr. B. Madhuprasad, Vice Chairman, Keynote Corporate Services. The other eminent speakers included Mr. Prashant Shetty, CEO, IDFC Capital, Mr. Rajiv Anand, CEO, Axis Mutual Fund, Mr. Sunit Joshi, Head-Capital Markets Group, SBI Capital Markets and Mr. Subrata Ray, Sr. Vice President, ICRA. There were Keynote Addresses by Mr. Viney Kumar, Executive Director, IDBI Bank and Mr. Sanjay Jain, Managing Director, head-Global Capital Markets, JM Financial on both the topics respectively.