The credit crisis of 2008

http://www.nytimes.com/imagepages/2008/09/16/business/16primer.span.ready.html

Let the rupee ride

India seems to be the odd man out. At a time when global powers are lined up against each other over exchange rate management and the threat of competitive devaluation looms over everyone, India seems happy to let the rupee rise. This is even as exports are sluggish, a high negative current account balance persists, and foreign direct investment (FDI) is trailing portfolio investment in the current year in reversal of the earlier pattern. What gives?

The worrisome way of looking at all this is to identify a holy cow as the root cause. Nothing must be done to impede capital flows into the stock market which is getting on to a bull run of sorts. Middle class India has been waiting for this for two years now and there is no question of spoiling the party when it is just about to warm up by stemming the inflow of portfolio investment. Not just common folks, the big and the powerful with alternative resources will not have their round-tripping via the stock market stopped. So, no border restrictions, no Tobin tax a la Brazil. The short-term capital inflow continues unchecked, taking the rupee up and turning the tables against buoyant export growth.

The positive way of looking at the scenario is to argue that export sluggishness is a result of global trade not picking up as consumption trends in developed economies remain weak. According to the IMF (World Economic Outlook), global trade in volume terms is likely to rebound this year after falling last year, but is projected to grow at an average rate of 6.8 per cent over 2012-15, which will be less than the average 7 per cent achieved during 2000-07. As for the current account deficit, a fast-growing economy powered by high investment expenditure will have a keen appetite for import of plant and machinery which will lead to a sizeable current account deficit. The dissonance between FDI and portfolio investment also need not be considered a wholly negative development as the latter need not necessarily create an asset bubble. Corporate earnings are doing well, helping keep in check price-earnings ratios. Plus, anchor investors in public issues end up financing new capital assets.

Thus, while an appreciating rupee may not be doing the damage that it is popularly supposed to be, it can even be doing some good via the impact on inflation. Global commodity prices, on their way up once again, will sharply impact core (non-food and non-energy) inflation during a period of high industrial growth. Since bringing down inflation while sustaining rapid growth is the key task ahead and agricultural prices remain stubbornly high despite a good monsoon, a strong rupee that keeps raw material import costs down is a great help.

There is yet another reason why clever policy-makers may be secretly happy to live with a robustly valued rupee. Indian tariff rates remain high and should be brought down progressively. Bringing down nominal tariff rates is unpopular with domestic industry. It is so much simpler to let the job be done via creeping currency appreciation. Greater import competition for domestic industry does wonders to a country’s competitiveness over time. The appreciation of the rupee since August, assuming a median import tariff of 10 per cent, has brought down the landed cost of imports by 6 per cent. Being able to stand up to cheaper imports is the obverse of being able to competitively export. So that loops back to export performance where we began.

There are a couple of recent developments that go against this line of reasoning. Recent industrial growth rate figures show a decline largely as a result of poor performance by capital goods. This and a declining order book position do not portend well for investment expenditure which has been a driver of high growth. Faltering growth and appreciating rupee do not go well together. But neither the private nor the public sector currently appears reluctant to invest. Business confidence is at a high and there is no resource crunch for public investment. We may eventually see imports matching a lot of investment expenditure but that will only point to the need to address the competitiveness of the domestic machine-building sector. If Bhel’s power plants cannot compete with Chinese equipment in price, then they must at least be clearly superior in quality.

The foremost agenda for policy-makers is to bring down inflation which is largely the result of high food prices. An appreciating rupee is not a contributing villain. In fact, cheap imported edible oils and pulses help contain food prices. Export competitiveness is indeed a priority but a favourable exchange rate is more of a quick fix. Neither auto components nor software exports seem to be suffering from an adverse exchange rate. Apparel exports are, but that is because western demand for higher-end garments (India’s niche) is yet to pick up and a lot of Indian garment factories are uneconomical in size, a hangover from the days when factories were kept small so as to qualify for being small scale. Export competitiveness is a long, hard-fought battle, won industry by industry, cluster by cluster. Auto components (Deming prize), software (CMM Level Five certification) and pharmaceuticals (FDA certified facilities) all score on quality.

The current growth-induced tax buoyancy and disinvestment inflows offer the government a golden opportunity to improve the fiscal balance which is vital for achieving price stability. Once that is achieved, the rupee can be left to find its own level. The benefits of doing so outweigh those from keeping the rupee cheap.

Source: http://www.business-standard.com/india/news/subir-roy-letrupee-ride/412785/

U.S. Should Not Force China to Revalue Currency

The United States should not coerce China into revaluing its currency because such arm-twisting will be of little help in easing America's trade deficit, an expert said Tuesday.

"China has every rights to manage its currency reforms and appreciation in a gradual way," Stephen Roach, a senior executive with Morgan Stanley, said in a local business forum. "This reflects understandable and correct fixation on financial stability that China needs and the world needs."

His remarks come as the United States is stepping up its pressure on China to allow the rapid appreciation of the yuan, accusing the Asian economic powerhouse of aggravating the U.S. trade deficit and hampering its job market.

U.S. policymakers blame massive imports from China, made possible by its undervalued currency, for its widening losses from trade and sluggish employment by U.S. firms.

Speaking to the World Knowledge Forum, the Morgan Stanley executive refuted the U.S. government claims and instead urged China to adopt local consumption-boosting measures to address the trade imbalances between the two countries.

"(The U.S.-China imbalance) is not necessarily manifest in mis-evaluation of the currency but in a massive saving surplus of China," Roach, also a lecturer at Yale University, said.

"China must put pressure on its policy makers to enact aggressive pro-consumption policy stimulus measures to absorb the surplus savings."

If such measures are adopted, the United States would have enormous economic opportunities by boosting exports to China and subsequent job creation, he noted.

Banks find it pays to keep BPLR loans

Three months after the base rate regime to price loans began, only a handful of customers have shifted to it from the erstwhile benchmark prime lending rate (BPLR) system. But don’t blame only lack of customer awareness. Banks are also finding it more profitable to keep customers in the BPLR regime. This is because the ‘exact mapping’ envisaged by banks has not happened. Mapping refers to keeping the effective interest rate intact while shifting from BPLR to the base rate. For example, if a client was charged BPLR plus two per cent for working capital loans, assuming a 12 per cent BPLR, in the base rate it would have been base (eight per cent) plus six per cent with mapping.

But this hasn’t happened as bankers fear a hue and cry among customers in case high spreads are shown. “No new customer will come to banks if spreads are shown as high as 600 basis points (bps), which were 200 bps in the BPLR regime,” said a senior banker from a public sector bank.

What has happened in some cases is mapping of spreads, instead of the mapping of rates, because of which effective interest rates are lower in the base rate system than in the earlier regime. As a result, according to a senior public sector bank executive, “In some cases, it is not viable for the bank to shift the customer to a base rate, if spreads are mapped. For example, in case of a client who pays interest linked to BPLR (of 10 per cent), he is charged 14 per cent on a term loan, which captures risk, including credit risk.”

Now, if this SME client is shifted to the base rate system, if spreads are intact, the effective rate charged will be 12.5 per cent if the base rate is 8.5 per cent. This would mean a dip in interest income for the bank, something not acceptable at a time income growth was subdued, he added.

And since, according to norms, both the parties have to agree to such a shift, banks are not interested in shifting the loan to the base rate mechanism, a s spreads will be lower. As a result, most government-owned banks have seen only 10-20 per cent of the loans shifting to the base rate regime.

“So, as far as working capital loans are concerned, these are mostly for a year. So, it is better for us to wait until the contract comes for renewal,” said the chairman and managing director of a mid-sized public sector bank.

In term loans, especially to retail borrowers, it is mostly the borrowers who are not willing to shift, as they find that the BPLR rates are lower.

Though most banks have implemented one round of increase in BPLR, mainly to encourage existing borrowers from moving to the base rate, bankers feel another round of BPLR rise is required to induce term-loan takers into the base rate regime.

The bankers had requested RBI to invoke a sunset clause for all BPLR-linked loans. RBI is studying the legal implications of the clause. This is because certain customers can move court if the original contract agreement is not honoured.

Source: BS

Portfolio Management Style - Active & Passive management

As some asset managers have fallen short of investors’ expectations, individual and institutional investors are asking themselves the same question, “are these fees worth the added benefit?” In this article, we will provide insight by comparing and contrasting traditional, long-only active and passive portfolio management.

Active and passive management are two broad-based styles of managing a pool of assets. Both styles see the same investment universe but in different ways. Active managers seek to return a risk-adjusted premium that outperforms their benchmark or tracking index. Generally, active equity and fixed income managers are compensated based upon a percentage of assets. On the flip side, active management requires more research and due diligence for exploiting market inefficiencies and purported above-average returns.

Active management fees for U.S. equity mandates benchmarked against the S&P 500 varied from 25 to 180 bps per annum (median fee was 51 bps <-- basis points, 100 basis points = 1% ). Active management fees for U.S. fixed income mandates benchmarked against the Barclays Capital U.S. Aggregate varied from 16 to 56 bps per annum (median fee was 26 bps). Security selection, sector allocation and the ability to generate alpha or risk-adjusted excess returns are reasons often cited for higher active fees

Passive management on the other hand is a manager’s approach to mimic a set of securities, such as an index. These managers are looking to generate a return and risk profile that resembles that of an index, regardless of how the individual securities perform. Investors are still charged a management fee; however, the fees are much lower (the median fee for both equity and fixed income managers is roughly the same, 8 bps). Fees are less because buying and selling of securities occurs less frequently, suggesting that there is less active involvement in security selection and monitoring.

Generally speaking, an efficient market is one in which prices of traded assets already reflect all known information about the particular instrument. Highly efficient markets or segments within an overall larger market are easier to passively track. Efficient Market Hypothesis postulates that active managers may not make recurring profits through trading because the market price reflects all information already, depending on the form of efficiency.

The large-cap space within the U.S. equity market is highly efficient, whereas the small- and mid-cap space is less efficient. Thus, inefficient or less covered markets and market segments present active managers with added opportunities to generate alpha (<-- excess return over the benchmark index, which the portfolio manager wants to beat)

Your currency, our problem!

Source:http://economictimes.indiatimes.com/opinion/columnists/mythili-bhusnurmath/Your-currency-our-problem/articleshow/6681352.cms

It's the silly season for currency interventions. Last week, Guido Mantega , finance minister of Brazil warned an 'international currency war' has broken out. As Brazil's central bank scrambled to buy close to $1 billion a day for almost two weeks - about 10 times its daily average - Mantega was only voicing what many governments have already expressed privately. That for all the calls for collective action and bonhomie displayed at various G20 meetings, when it comes to ground realities, it is each country for itself!

So, what's new about that? What is new is that unlike in the past when 'currency intervention' was always a developing country refuge, a third world stratagem that first world countries eschewed, this time round, first world countries are nothing loath to join the game.

Last month, Japan joined Switzerland in intervening in the foreign-exchange market. As the yen surged to a little short of 90 to the dollar, the strongest in 15 years, the central bank, fearing a strong yen, would jeopardise recovery, sold an estimated $20 billion yen. The last time it intervened to sell yen in the foreign-exchange market was in 2004, when the yen was around 109 per dollar.

It is not the only one. The Swiss central bank has been intervening to prevent the appreciation of the Swiss franc against the euro for close to six months now. The last time it intervened was in 2002. The Japanese and the Swiss are not alone. South Korea, host to the next G20 meet, has shown as much alacrity in intervening to keep the won weak; so have Taiwan and Singapore.

In the developing world, meanwhile, currency intervention has become much more frequent. China, an old hand at the game, has been joined by Brazil, the Philippines, India and Malaysia, to mention just a few. The danger is if intervention becomes the norm, rather than the exception, the resultant 'currency war' will not leave any winners. Worse, it will mean goodbye to any hopes of rebalancing the world economy.

Why is that important? Because as long as the global economy remains perilously unbalanced, the next crisis is not far away. Orderly currency realignment is, therefore, critical to rebalancing. But that calls for coordinated action by the major world economies (read G20) - not haphazard, beggar-myneighbour intervention of the kind that seems to be the fashion now.

The reason is simple. Cheap money policy in the US that causes the dollar to weaken against other currencies will help boost US exports and rein in the US current account deficit. Provided no country intervenes! So, left to itself, this realignment in currency values is a part of the remedy the world is seeking.

But this is where the catch lies! China, the world's largest exporter, continues to suppress the value of the renminbi. In the pre-crisis days, when economic growth was strong, most countries were prepared to look the other way and restrict their response to jaw-jaw. Not any longer! Today, as countries struggle to remain competitive in the global market, many seem to have decided to copy the Chinese. Hence the proliferation of currency interventions aimed at making currencies cheaper in order to boost exports.

Inflation.. & everything around it

Consumer price inflation in India has been close to or above double digits for nearly two years, and the more cyclically sensitive wholesale price index, after dipping into deflation territory last year, has been steadily rising to surpass double digits.

The puzzle is simply this: why is inflation in India so stubbornly high and so much higher than other emerging markets, even those that are supposedly overheating, such as China, Korea and Indonesia, where inflation is closer to 3 per cent?

First we consider a few standard explanations.
1. The supply shock factor - relates mainly to agriculture. The weather Gods failed us last year, India’s agricultural output suffered a sharp drop as a result, supply declined and prices rose. The monsoon is looking better this year, so the agricultural shock factor will not have the same bite going forward. And fuel price increases should be of a one-off nature rather than an ongoing source of inflation. Moreover, rising prices are not restricted to agricultural goods and have now spilled over into other commodities: double-digit price increases are no longer confined to agricultural commodities.

Cure : Well, no one can do anything when Gods go crazy..!!

2. Policy shock - Prices of fuel have recently been increased, which is contributing to overall price inflation. Minimum support prices for agriculture have also been increasing. Further, in the face of agricultural supply shocks, price smoothing by the government through greater imports and faster depletion of domestic stocks has been woefully inadequate.

Cure : Better, more thought out policies, or counter policies. <please pour in your thoughts>

3. Overheating: the supply capacity of the economy is simply unable to match the demands on that capacity - Overheating in India can be an agricultural phenomenon or an economy-wide pathology. In either case, there is cause for worry because the implication is that the economy’s current growth rate of 7-8 per cent is above its potential or trend growth rate. In this view, and unless capacity can be significantly increased, attaining China-type double-digit growth rates will remain elusive.

In agriculture, a scissors effect seems to be at work. On the one hand, productivity growth, especially in pulses, is anaemic and possibly weakening further. On the other hand, purchasing power and hence demand are accelerating, courtesy the NREGS (which is increasingly looking like a pure cash-transfer programme).

For the rest of the economy, they could be inadequate investment in infrastructure, inadequate supplies of skilled labour (always a possibility in India because its growth model is so skills-reliant), slow total factor productivity growth or some combination of all the three.

Cure : Given the capacity situation, aggressive monetary policy action will be warranted to bring inflation below 5 per cent..where political pressures come into play while tightening rates, etc.

4. A type of cost-push inflation - Serious micro-economic distortions afflict the land market . In itself, this distortion cannot cause inflation because presumably the distortion leads to a one-off increase in the price of land as an input. In other words, the distortion, unless it is continually worsening, will have increased the price level but cannot cause price inflation.

(meaning of the above para in a more layman language, correct me if I have explained it wrong: that due to whatever reason prices at some places may be sold at higher rate than the market rate, which keeps happening all the time, but that does not mean that the market prices have changed)

But suppose that these micro-distortions interact with macroeconomic factors such as surging capital inflows into real estate and housing. Such surges will lead to sudden increases in the price of land and related inputs, raising the cost of production in the economy as a whole.

A whole range of services, such as retail, construction, entertainment, education and finance — which account for progressively larger shares of the economy — use significant amounts of land as an input, a fact that gets overlooked in inflation discussions, which tend to focus on agriculture and manufacturing (this may also explain why inflation in consumer prices, which reflect services to a greater extent than wholesale prices, has tended to be above wholesale price inflation).

Generalised cost-push inflation could then be a natural consequence with the push resulting from the interaction between a pre-existing microeconomic distortion and a macroeconomic factor that serves to aggravate this distortion, converting a price-level effect into an inflation effect.

Cure : Microeconomic : Clearly, the first best solution is to eliminate the distortions in the land market of which there are many, including urban land ceiling and tenancy laws. The resulting boost to productivity would increase the overall supply capacity of the economy, making inflation less likely. Structural reforms of the land market will thus be good for inflation and good for growth.

Macroeconomic : But if land market reforms are infeasible, and inflation continues to be above acceptable levels, policy-makers may have little choice but to address the macroeconomic factors that aggravate the underlying distortion. In some cases, this may require dampening foreign capital flows, especially those going to real estate and housing; or they may involve other prudential measures such as higher provisioning requirements for real-estate lending.

Types of Financial Risk

These are some specific types of risks that financial institutions come across when we talk about stocks and bonds. Most of us already know these given below, but still, it may be useful at some point in time

Credit or Default Risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. This type of risk is of particular concern to investors who hold bonds in their portfolios. 

Government bonds, especially those issued by the federal government, have the least amount of default risk and the lowest returns, while corporate bonds tend to have the highest amount of default risk but also higher interest rates. 

Bonds with a lower chance of default are considered to be investment grade, while bonds with higher chances are considered to be junk bonds. Bond rating services, such as Moody's and S&P, allow investors to determine which bonds are investment-grade, and which bonds are junk. 

In India, ICRA is the premier agency to do the rating. Following is the link to their current rating methodology. It might be updated according to business environment changes.

http://www.icra.in/Files/Articles/2009-October-Rating-Corp-Rating-Methodology.pdf

Country Risk - Country risk refers to the risk that a country won't be able to honor its financial commitments. When a country defaults on its obligations, this can harm the performance of all other financial instruments in that country as well as other countries it has relations with. Country risk applies to stocks, bonds, mutual funds, options and futures that are issued within a particular country. This type of risk is most often seen in emerging markets or countries that have a severe deficit. (For related reading, see What Is An Emerging Market Economy?) 

Foreign-Exchange Risk - When investing in foreign countries you must consider the fact that currency exchange rates can change the price of the asset as well. Foreign-exchange risk applies to all financial instruments that are in a currency other than your domestic currency. As an example, if you are a resident of America and invest in some Canadian stock in Canadian dollars, even if the share value appreciates, you may lose money if the Canadian dollar depreciates in relation to the American dollar. 

Interest Rate Risk - Interest rate risk is the risk that an investment's value will change as a result of a change in interest rates. This risk affects the value of bonds more directly than stocks. (To learn more, read How Interest Rates Affect The Stock Market.) 

Political Risk - Political risk represents the financial risk that a country's government will suddenly change its policies. This is a major reason why developing countries lack foreign investment. 

Market Risk - This is the most familiar of all risks. Also referred to as volatility, market risk is the the day-to-day fluctuations in a stock's price. Market risk applies mainly to stocks and options. As a whole, stocks tend to perform well during a bull market and poorly during a bear market - volatility is not so much a cause but an effect of certain market forces. Volatility is a measure of risk because it refers to the behavior, or "temperament", of your investment rather than the reason for this behavior. Because market movement is the reason why people can make money from stocks, volatility is essential for returns, and the more unstable the investment the more chance there is that it will experience a dramatic change in either direction.

More additions to be done shortly....

United Stock Exchange of India

The United Stock Exchange of India (USE) is an Indian stock exchange. It is the fourth pan India exchange to be launched for trading financial instruments in India over the last 140 years.

USE has received final approval from the market regulator SEBI to start currency futures trading. USE represents the commitment of ALL 21 Indian public sector banks, private banks and corporate houses to build an institution of standing.

USE also has Bombay Stock Exchange as a strategic partner.

Public Sector Banks that are stakeholders of USE include Allahabad Bank, Corporation Bank, Punjab National Bank, Andhra Bank, Dena Bank, State Bank of India, Bank of Baroda, IDBI Bank, Syndicate Bank, Bank of India, Indian Bank, UCO Bank, Bank of Maharashtra, Indian Overseas Bank, Union Bank of India, Canara Bank, Oriental Bank of Commerce, United Bank of India, Central Bank of India, Punjab and Sind Bank, Vijaya Bank. Private Sector Banks like Axis Bank, Federal Bank, J & K Bank, HDFC Bank. Corporate Institutions such as Jaypee Capital, MMTC and India Potash are also associated with United Stock Exchange.

USE launched its operations on 20 Sept 2010.

USE began operations in the future contracts in each of the following currency pairs:

• United States Dollar-Indian Rupee (USD-INR)
• Euro-Indian Rupee (EUR-INR)
• Pound Sterling-Indian Rupee (GBP-INR)
• Japanese Yen-Indian Rupee (JPY-INR)

There would be 12 contracts i.e. one for each of the next 12 months in each of the above currency pair

Outright contracts as well as calendar spread contracts are available in each pair for trading.

Source: http://en.wikipedia.org/wiki/United_Stock_Exchange_of_India

IPO story in India in 2010

Indian firms have raised more than $15 billion so far this year from share sales, third in Asia after China's $103 billion worth of issuances and Hong Kong's $18 billion, according to Thomson Reuters data. Bankers said total equity offerings in India could reach $25 billion to $30 billion in 2010, making it the best year since 2007 when $31 billion was raised from 202 issues, and compared to $20 billion last year.


Sept 21 - 25 : Busiest week for IPO market in 15 years - a choice of 11 IPOs

This week is slated to be the busiest in the last 15-years for the primary market, with eight companies seeking to raise around Rs 3,000 crore through public offers, in addition to three already underway.


The companies, which are hitting the primary market this week include, Orient Green Power (Rs 900 crore), VA Tech Wabag (Rs 500 crore), Electrosteel (Rs 285 crore), Tecpro Systems (Rs 268 crore), Ashoka Buildcon (Rs 225 crore) and Gallant Ispat (Rs 40.50 crore).While Ramky Infrastructure and Cantabil Retail will hit the capital market with issue sizes of Rs 530 crore and Rs 105 crore respectively.

Indian Companies doing IPOs in US - MakeMyTrip


MakeMyTrip, the parent firm of India's largest online travel company, MakeMyTrip India, is selling the first U.S. initial public offering (IPO) by an Indian company in four years at a 26 percent premium to the biggest online travel agencies

MakeMyTrip will be the first IPO by an India-based company in the U.S. Morgan Stanley is the sole book running manager to the offering and Oppenheimer & Co Inc and Pacific Crest Securities LLC will act as co-managers.

MakeMyTrip is offering 5 million shares at $12 to $14 each. The India-based company at 5.41 times next year's sales, higher than the average of 4.28 for U.S.-traded stocks from Expedia to China's ELong.

MakeMyTrip booked about 48 percent of the $1 billion in online travel reservations made in India last year. Yatra.com and Cleartrip.com accounted for a combined 42 percent of sales.

Companies with recently concluded IPOs

Recently, public issues of a number of entities including SKS Microfinance, Prakash Steelage Ltd and Gujarat Pipavav Port Ltd got good response from investors and were oversubscribed. Listing of these firms was also impressive. The follow-on public offer of the state-run Engineers India Ltd also received big investor response.

Continued below are details about some famous IPOs that have happened in the recent past.

SKS Microfinance

When SKS Microfinance launched India’s first initial public offering (IPO) on July 28, 2010, the total share issue received bids for 13.55 times the overall shares on offer, with the institutional share offer oversubscribed by 20.3 times. The share bids were at the high end of the INR 850 to 985 (USD 18.42 to 20.04) price range. SKS Microfinance allocated 3.02 million shares at INR 985 (USD 20.04) per share to 36 anchor investors, including: ICICI Prudential, an Indian life insurance company; BNP Paribas, a French global banking group; Nomura, a Japanese global investment bank; Reliance Capital, an Indian non-banking financial company; and three U.S.-based financial institutions, JP Morgan, Morgan Stanley and Goldman Sachs.

SKS Microfinance is an Indian microlender that delivers microfinance products through a group lending model to impoverished women in India and had total assets of USD 596 million at March 31, 2009. SKS Microfinance was founded by Vikram Akula and is backed by venture capital fund investors Quantum Hedge Fund, Sequoia Capital and Sandstone Capital.

Engineers India Limited

Incorporated in 1965, EIL is an engineering consultancy company providing design, engineering, procurement, construction and integrated project management services, principally focused on the oil and gas and petrochemicals industries in India and internationally. Over the Years, it has developed expertise to cater the needs of petrochemicals, fertilizers, metals, & Power sectors, however currently more than 90% of business comes from hydrocarbon sector.



Objects of the Issue : To dilute GOI holding as a part of disinvestment Plan, proceeds will go to GOI.
The government holds 90.4 per cent stake in EIL, which provides design and engineering services for petroleum, power and fertiliser companies. Post FPO, government holding in EIL will fall to 80.4 per cent.

The government set Rs 270-290 as the price band for the follow-on public offer (FPO) of state-run Engineers India Ltd (EIL). The Rs 977-crore FPO had received an overwhelming demand from all market participants, including retail investors, making it one of the best divestment offers by the government so far this fiscal. In the portion reserved for institutional buyers, the FPO was subscribed 23.43 times. The government, which holds a little over 90 per cent in EIL, is selling 10 per cent stake through the FPO.


The issue price of  Rs 290 was determined by the government for public sector EPC and consultancy firm Engineers India Ltd (EIL). This is the upper end of the price band. “Issue price has been fixed at Rs 290 a share. A discount of 5 per cent will be given to retail bidders and to employees,” officials sources said.
The public issue, which was oversubscribed 13 times, will fetch Rs 950 crore to the government. The offer was open between 27 July  to 30 July. The government is offering a discount of five per cent to retail investors– an allotment price Rs 275.50 a share.

Cairn Vedanta deal

***** rough draft meant for testing *****

Vedanta attached a summary of the deal where Cairn Energy is selling a 40-51 percent stake in its Indian arm to Vedanta Resources Group for up to $8.48 billion.

he Oil Ministry has shown signs of discomfort at a non-oil firm taking control of a company whose main property is the Barmer district oilfields in Rajasthan

Cairn India's contract with the government for three oil and gas producing properties including the one in Rajasthan, do not provide for prior government approval in case of a change of control happens at the corporate level.

The only contracts that provide for government permission in case corporate ownership of Cairn India changes are seven exploration blocks the company had won under New Exploration Licensing Policy.

"Hypothetically speaking, if the oil ministry was to act tough, Vedanta can tell the ministry to keep the exploration blocks and walk away with the Rajasthan oilfield, the Ravva oil and gas field (in eastern offshore) and the Cambay block," he said.

"The $9.6 billion that Vedanta is paying is for these three fields and not for the exploration areas."

Oil and Natural Gas Corporation (ONGC) declared that without its approval UK's Cairn Energy Plc can not sell its stake in Cairn India to London based Vedanta Resources.

The state owned company's (ONGC) claim is based on the pre-emptive rights in oilfields like Rajasthan, where it is an equity partner with Cairn India.

The pre-emptive right is to maintain current shareholder's fractional ownership of a company by buying a proportional number of shares of any future issue of common stock.

ONGC, which owns 30 percent in the 6.5 billion barrels Rajasthan block, believes that with the stake, it has the pre-emptive right of first refusal to buy Cairn India in case the company's ownership changed.

ONGC owns 30% in Cairn India’s prolific Rajasthan oilfields, which is at the centre of the $ 9.6-billion takeover deal by London-based Vedanta group.

The petroleum ministry says the deal needs the ‘prior written consent’ of the government according to the requirements of the production sharing contract (PSC).

ONGC’s right of first refusal in the case of sale of an asset cannot in any way help in blocking the deal as ownership-change in a company cannot be equated to the sale of assets. The government can shoot down the deal only if the PSC allows it to, they said.

Anil Agarwal owned Vedanta Resources on Aug 16 had offered to take over 60 percent in Cairn India for $9.6 billion.

Though the offer sparked objections from sections of the government that are seemingly reluctant to part with a profitable oil producing asset to Vedanta.

Why is the carry trade so dangerous ?

 Few people can resist the lure of free money. Hence the recent fad for ‘stoozing’; borrowing large sums on credit cards with a 0% interest rate and investing the proceeds in a savings account.

Without having to advance a penny of their own money, the borrower can pocket a few hundred pounds a year in interest. When the credit card’s zero-rate period comes to an end, the borrower pays back the loan or, even better, rolls the debt over on to a new card. At one point a couple of years ago this trick was so popular that personal finance pages filled up with tips on how to do it.

Stoozing has gone out of favour somewhat since most credit cards began charging a balance transfer fee, making the returns less attractive (although you can still net 2%-3% a year from it). 

The big difference is that carry trades are a lot more dangerous than stoozing. Firstly, rather than being invested in a safe savings account, the money increasingly flows into riskier place, such as emerging market assets. Secondly, carry trades are often cross-currency carry trades, which carry extra risks.

In a currency carry trade, the speculator borrows money in a low-interest rate currency and buys higher-yielding assets in a different currency. Today, the low-rate currency is generally the Japanese yen; the higher-yielding assets are often US dollar bonds, but sometimes more esoteric assets such as Icelandic housing bonds or even emerging market equities or commodities.

The carry trade is appealing because of the type of returns it can earn, particularly if the proceeds are invested in bonds. These returns may not be huge, but they’re steady and consistent, and so they appeal to money managers who want a steady income stream – for example, hedge fund managers with pension fund investors.

But the counterpoint to these small, steady returns is the possibility of a very large, very sudden loss. The biggest risk is generally that the exchange rate moves against you – the higher-interest rate currency rapidly devalues, reducing the value of your assets relative to your borrowing. That's why these trades are often described as “picking up nickels in front of a steamroller”

So what might cause the carry trade to unwind? Dresdner Kleinwort strategist Albert Edwards identifies one route. Plenty of carry trade money has flowed into risky cyclical assets. As we head into the economic slowdown, these assets are likely to fall in value. As a result, speculators in them will cut their losses, bail out and repay their yen debts.

This flow of money back into yen could boost the yen’s exchange rate, regardless of the BoJ’s desire to keep the yen cheap to help its exporters. A rising yen would put other carry traders’ positions under water, causing them to sell off and head back into yen, and so on in a vicious circle.