Finmin Jingle: Taste the New Thunder Soon in FDI

NEW GOVT MEANS BUSINESS Modi Sarkar hits the ground running with finmin conjuring up a variety of measures to juice up the inert economy and light a fire in the market's belly Proposes at least 49% foreign investment in all sectors, barring a few strategic ones

The finance ministry is scripting a liberal foreign investment policy framework that will allow at least 49% investment in all sectors, barring a few strategic ones, as part of plans to stimulate overseas interest and help lift the economy out of a prolonged slump.

Moreover, the ministry will propose that the minimum 49% investment is allowed through the automatic route, without requiring time-consuming government approval, based on the argument that Indian-owned and controlled companies should not face undue scrutiny.

“If ownership and control rests in Indian hands, sectoral caps can be set at 49% as a default barring a few sectors,“ said a finance ministry official, justifying the liberal threshold in the policy paper the ministry has prepared for the incoming Modi government, which sees kickstarting growth as a priority. The official did not elaborate on the sectors but it is expected that defence, railways, e-commerce and media will be significant beneficiaries in this round of liberalisation. The proposal could also offer a way to settle the issue over FDI in multi-brand retail. The BJP, in its manifesto, opposed allowing entry to foreign retailers.
Scaling back FDI in the sector to 49% could be a compromise solution. But the final call will be a political one.

Arun Jaitley , who's the minister for finance and defence, has already indicated that he will look into the issue of FDI in defence. The ministry will also propose a simplification of policy that will end the differentiation among various forms of overseas investment through a composite cap structure. The sectoral 49% cap will cover FDI, foreign portfolio investment as also non-resident Indian investment (FDI+FPI+NRI).

Any investment over 49%, except when 100% has been permitted through the automatic route, will have to be approved by the Foreign Investment Promotion Board (FIPB), which will end all confusion over what requires clearance.

A composite cap formulation could be acceptable for the insurance and pension sectors as well, where the change would have to be carried out through legislation. The policy paper will focus on industrial sectors as captured in the National Industrial Code to give better clarity to foreign investors. It would spell out clearly the regime applicable for each industrial sector. “The idea is to devise a framework that would make it easier for the country to attract foreign capital,“ the official said. A company that is owned and controlled by an Indian should be treated differently than a company owned or controlled by foreigners.

A stringent definition of `control' that's already in place will ensure that managements don't enter into agreements with foreign investors that will mean surrendering control. The last round of liberalisation carried out by the UPA in September 2012 was based on recommendations made in a report by the economic affairs secretary .

Department of Disinvestment suggests strategic sale for non-core PSUs

The new government could look at the possibility of strategic sale of state-owned enterprises in the non-core sectors like steel and cement, the disinvestment department said in its presentation to the Cabinet Secretary. 

The move to divest entire stake in the non-strategic PSUs, the official said, will also help in meeting the ambitious disinvestment target of Rs 51,925 crore this fiscal. 

Alternatively, the official suggested, the government could follow the existing practice of piecemeal stake sale in state- owned companies. 

The strategic sale, however, could be a better option as it would help the government in realising the true value of the investments made in setting up of the PSU. 

These views formed part of the suggestions made by the disinvestment department to Cabinet Secretary Ajit Seth, who is collecting inputs from various ministries for the new government which will assume office on May 26. 

The official said non-strategic PSUs from which the government could easily exit relate to sectors like cement, steel, textiles, fertiliser, petrochemical and transport equipments. 

The government, the official added, could keep its control over sectors like petroleum, heavy engineeringBSE 5.73 %, power. 

As per the interim budget presented in February, the UPA government proposed to mobilise Rs 15,000 crore from the stake sale in HZL and Balco. Further, it hopes to garner Rs 36,925 crore from disinvestment in different PSUs in 2014-15. 

The government expects to sell its remaining stake in Hindustan ZincBSE 3.66 % (HZL) and Balco in 2014-15. It sold majority stakes in the two companies to the Vedanta Group during 2001-2003 and now holds 29.54 per cent in HZL and 49 per cent in Bharat Aluminium Company (Balco). 

The government also holds some stake in Larsen & Toubro, Axis BankBSE 1.43 % and ITCBSE 0.79 % through SUUTI. 

Imported Solar Cells to get Costlier

Govt may impose duty in range of 50-60% on gear from the US, 100-110% from China

Government is likely to impose a steep dumping duty on solar gear imports, a move that could deal a massive blow to solar power producers in India. The commerce ministry has identified a dumping margin range of 50-60% from the United States and 100110% from China, which is the largest exporter of solar cells worldwide. The ministry has identified 58 manufacturers, mostly from China, followed by Taiwan, Malaysia and the US as the subject countries involved in the case of dumping filed by a group of domestic manufacturers two years ago.

“The dumped imports of the subject goods from the subject countries have increased in absolute terms as also in relation to production and consumption of the subject goods in India. The imports of the subject goods from the subject countries are undercutting the prices of domestic industry . Further, the dumped imports have caused price underselling, price suppression as well as price depression effects,“ the ministry said in a statement. However, the domestic manufacturers are looking forward to a level playing field following the imposition of duty .

“Revival of manufacturing in India is vital to meeting the new government's objectives around development. Here is an opportunity to send out a strong message by revitalising Indian solar manufacturing,“ said Vivek Chaturvedi, chief marketing officer, Moser Baer Solar.

The commerce department has determined a dumping margin of 60-70% for sampled manufacturers from China and 100-110% for nonsampled, indicating an unorganised market of imports flowing in from China into India. The dumping margin for First Solar, a USbased solar cell manufacturer, has been kept at 5-15% and for all other exporters at 40-50%. For Malaysia and Taiwan, the ministry determined the margin at 70% and 90%, respectively .

For FIIs, India is the best in EM basket

That "the darkest hour of all is the hour before the dawn" is an old Irish saying, meant to inspire hope under adverse circumstances. The proverb fits the trajectory of Indian markets and foreigner investors' attitude towards the country over the past year. Around a year ago, when the rupee began to depreciate in May 2013 amidst poor macroeconomic fundamentals and monetary tapering by the US Federal Reserve, it seemed that India had lost the economic plot and risked becoming an untouchable among emerging markets (EM) peers.

Fast forward to 2014 and the gloom and doom scenarios of 2013 seem a distant memory. The rupee is up nearly 10 per cent from the lows of October 2013 and foreigners are queuing to grab a bigger pie of the India growth story.

Foreign institutional investors have pumped nearly $5 billion in Indian equity market since the beginning of the year, on top of the $24.5 billion invested in the 2013 calendar year. In comparison, until the first week of the new quarter (January-March, 2014) EMs collectively had 22 weeks of consecutive outflows from EM funds, according to data from funds tracking agency EPFR. According to various estimates, India has absorbed nearly 60 per cent of all equity inflows into EMs in the current year so far.

MNCs meanwhile continue to scale-up their presence in India, either through projects or mergers & acquisitions.

Experts are not surprised. "Unlike domestic investors, MNCs were always convinced about the medium and long-term growth prospects of the Indian economy. Their faith has been reinforced by recent improvement in macroeconomic indicators and they are positioning themselves to make the most of the next wave of growth in India," says U R Bhat, managing director Dalton Capital Advisors.

For others, emerging markets are now a value buy, given the valuation differential with the developed markets. "All the talk of an emerging market crisis has continued to open up the valuation differential in favour of the former. We see EMs as cheap in absolute terms relative to both itself and against developed markets," writes Markus Rosgen of Citi Group.

The optimism is visible in macroeconomic indicators. India's current account deficit more than halved to two per cent of gross domestic product in the 2013 calendar year from a record high of 4.7 per cent in the previous year, according to figures by International Monetary Fund . In comparison, countries such as Turkey, Brazil and South Africa continue to struggle with high CAD putting their currencies and sovereign ratings under pressure

The difference has been the way the Indian economy and business reacted to currency depreciation. India's merchandise exports grew 5.3 per cent (in dollar terms) in 2013 against two per cent decline in the previous year. Exports including IT services did even better. For example, Tata Consultancy Services revenues were up 16.2 per cent year-on-year in dollar terms in FY14, while Infosys' revenue growth was 11.2 per cent. Import decline was partly due to higher import duty and curbs on gold imports but anecdotal evidence suggests companies and consumers substituting expensive imports with relatively cheaper domestic alternatives.

The adjustment is taking much longer in other EMs. For example Brazil, Indonesia, South Africa and Turkey reported a higher CAD in 2013 than the previous year. The main reason has been their import stickiness and slow moving exports. In all the four countries, imports grew faster (or fell less than) exports in 2013, despite double-digit currency depreciation (see chart on currencies).

"Investors should be very selective about countries, focusing on those that have reduced external vulnerabilities by addressing current account deficits, growth has stabilized and political and policy reform is high on the agenda. We continue to like Indonesia and India on these metrics (though both are obviously now more expensive) where all three components of GDP growth - consumption, investments and net exports set to improve in the short term," says Nick Paulson, head emerging markets, at Espirito Santo Investment Bank.

Then there is the "Modi rally" with investors expecting the BJP-led alliance to form the next government which they believe will be more market and business friendly. "Inflows from NRIs have increased significantly in last few months in the expectation of faster growth and currency appreciation post elections," says Rajesh Saluja, CEO and MD, ASK Wealth Advisors.

Everyone, however, is not buying the turnaround story. With public debt to GDP ratio of around 67 per cent in 2013, India is one of the most indebted countries among its peers. So is the case with consumer inflation in India.

"Don't bet on a quick recovery as yet. The moment the next government removes restrictions on gold imports, ratios will reverse and you could see large outflows," says the CFO of a leading company.

‘Sensex will hit 60,000 over next four years’

How do you interpret the present rally with the market hitting all-time highs? Does it represent a bubble waiting to burst?

We have a significant risk now on this score.

But post-elections, if we have a stable Government, particularly a BJP-led Government, there is a possibility that a new rally in the market will start. In my view, the Indian market in terms of the Sensex has to go to 60,000 levels over the next four years to deliver globally historical returns. If I say this openly people will beat me up but if it doesn’t happen it will prove the 150-year-old recorded history of stock markets in the world is wrong.

Do you think that while expectations have been priced in, the risks have not been?

Yes, I agree. May 14, 2004, was the first major crash in the market in the last 50 years when Manmohan Singh became PM with the support of the Left parties.

On the day of the results, the market went down 15 per cent as it was expecting the continuation of a Vajpayee-led Government. Similarly this time, if the BJP does not form the Government there will be a crash but not necessarily by 15 per cent.

What would be your advice to retail investors?

The market is at a unique low point of a six-year bad phase, and that cycle is perhaps at its bottom. In 2008 it was at 21,000-22,000 level and from that point onwards every year it should have given 15 per cent returns but it didn’t happen. However, once the market revives, it will eventually give that kind of returns. There is no relevance to the view that the market is high and has already gone up, since in real terms the market has not gone up. So, people should take risks and invest their savings in instalments and not miss this opportunity. They should now divert at least 25 per cent of their savings to the equity market.

What changes are taking place in the brokerage business?

Broking firms would have to undergo a structural change in the manner in which they operate because of technology.

Till 2007-08, which was the last bull market, technology was not significantly used. But, today’s generation doesn’t want to call a broker over the phone; they want to trade over the mobile and Internet. Hence, the execution part will completely shift to a technology-driven platform. And since a large number of brokers will not be able to invest in technology that involves huge investment, they will face the issue of survival. They would have to shift from execution to advisory, financial planning or wealth management platform. This has already started happening.

What are the challenges faced by the traditional brokers apart from rising costs and falling revenues?

They face two challenges. They have not been investing in technology, in knowledgeable and well-qualified people to service new-age clients in a complex market. Today, the Indian broking industry is yet to equip itself to give investors advice on when to invest and where to invest. The next generation brokers will make money by acquiring new expertise and skill-sets required to answer these two key questions and help service the new generation of investors.

What are your future plans to grow the business?

We are investing significantly on our mobile trading platform than opening new branches. Over five years, mobile, including tabs and iPads, would be 50 per cent of the market. So, in the next phase, you will not see an increase in the number of branches of broking houses, but a lot of people getting hooked to the advisory platform wherein they will give advice to clients and clients will trade on their own.

Now,IMD Arm Warns of Poor Rains this Year

April-June to be wetter and July drier,says Regional Climate Centre 

India should brace for a weak monsoon season as El Nino conditions are likely to develop,but before rains dry up,the ongoing wet spell will continue until June,weather scientists have forecast,casting a shadow on the rabi harvest and the planting of summer crops such as paddy.

This is not the official monsoon forecast of India Meteorological Department (IMD),but the outlook prepared by the Pune-based Regional Climate Centre,which is a part of IMD.Forecasters from Australia,China,Korea and the US have issued El Nino warnings,but so far the Indian weather office has rubbished the concerns as western propaganda to rattle Indian markets.Monsoon outlook is indeed sensitive for the economy and the market.Although the country has sufficient stock of foodgrain,a negative monsoon adversely affects the entire economy.

In 2009,when an El Nino severely disrupted monsoon rains,India saw a sudden burst of food inflation,which continued relentlessly for years,forcing the Reserve Bank of India to keep interest rates high despite persistent protests by industry.

Temasek Backs StarAgri with 240-cr Investment

Indias largest post-harvest agri solutions provider had earlier raised.150 cr from IDFC PE 

Singapore state-owned investment company Temasek Holdings is investing.240 crore for a significant minority stake in Star Agriwarehousing and Collateral Management Limited,one of the countrys fastest growing agrisolutions companies.Started by four former franchisees of rural lending products from Rajasthan in 2006 with deep family roots in commodity trading, StarAgri has emerged as one of the countrys largest post harvest agri-solutions provider offering modern and mechanised rural supply-chain infrastructure like farm procurement,logistics services,warehouses,labs and collateral finance.Known in the commodity trade as a company started by 1 Suresh and 3 Amits,StarAgri currently has a pan-India footprint of over 700 warehouses across 16 states and over 1.5 million tonnes of warehousing capacity.

It caters to customers ranging from banks to international bulk commodity buyers like Cargill,Bungee and food and FMCG companies like Britannia and commodity exchanges.While Suresh Goyal is the chairman and managing director of the firm,Amit Mundawala is in charge of operations with an eye on creating rural finance networks.Amith Aggarwal looks after finance and HR;with Amit Khandelwal is in charge of business development.When contacted,Amith Agarwal,co-founder and executive director of StarAgri,refused to comment on the issue.Mails sent to Temasek did not get a response till the time of going to press.

The investment reflects Temaseks growing interests in agrisolutions businesses and assets as rising populations and emerging middle class boost food demand worldwide.

Last year,Temasek made its boldest bet in the space in India when it pumped in.572 crore for a 19.9% stake in Godrej Agrovet,a diversified agribusiness company of the eponymous group,furthering its partnership with the conglomerate.Last month,a unit of Temasek offered to buy Olam among the worlds top three coffee and rice traders in a $4.2-billion cash deal.

Sources aware of the developments said the fund from Temasek will be used to create further infrastructure,better technologies and private mandis with a special focus on states like Madhya Pradesh,Rajasthan,Gujarat and Maharastra.Such one-stop solutions are aimed at reducing crop wastage and build efficiency in the agrisupply chain

.These mandis marry the efficiencies of a physical marketplace with international price discovery mechanism benefiting farmers as well as buyers like millers and agro-processors.Temasek will provide second round of funding to the company,reinforcing large-scale institutional backing at a time when the entire commodity trade has been much maligned due to empty godowns and fake NSEL trades.In 2011-12,IDFCs private equity fund had invested.150 crore for another large chunk in the company.

The two funds put together will own a significant minority shareholding in the company.Sources add that IDFC PEs investment has already trebled in just two years.Given the exceptionally high amount of food wastage in India,global PE investors are showing interest in agri-logistics,drawing high valuations for their scalable and high growth businesses.

According to Venture Intelligence,PE firms have invested about.940 crore in 11 companies in the sector in the past three years.Analysts say,agri-warehousing accounted for approximately 15% of the warehousing market in India which is worth.8,500 crore.