Current Economic Statistics and Review For the Week 
Ended August 27, 2005 (35^th Weekly Report of 2005)

  I

Theme of the week:

Role of FIIs in the Indian Capital Market:
Is There a Cause for Concern? ^*

As the stock indices charter into unprecendented territories rapidly, wherein the BSE sensex has touched an all-time high of 7900 points, the regulators and the government are rightly worried. With the FII inflows in the stock market touching record highs, the government is reportedly making plans to raise the barriers on unregulated foreign entities from accessing the Indian capital market. It plans to do this by tightening the use or misuse of a whopping Rs 40,000 crore of Participatory Notes (PNs)[1] that have been issued overseas to investors and hedge funds that are either not eligible to invest in India, or find it too tedious to go through the formalities required to invest directly. The government also plans to restrict sub-accounts of Foreign Institutional Investors (FIIs). This move seems to be a response to the possible unbridled speculation in the market. In fact, a report by Credit Lyonnais Securities (CLSA) predicted a 14 to 20 per cent correction because of over-speculation in the Indian market. Clearly, even the bullish foreigners are beginning to acknowledge that the bull run has now entered dangerous territory.

The government had set up an expert committee under the Chief Economic Advisor Ashok Lahiri to find ways of “encouraging FII inflows and checking the vulnerability of capital market to speculative flows”. The report was submitted to the Finance Ministry last month. The committee says that, “there is some evidence that the impact of international portfolio flows on stock prices depends on whether such flows are ‘expected’ or ‘unexpected’ and on composition of such investment”.

It also says that, “one of the worries stemming from the informational asymmetries between foreign investors and domestic investors is the problem of herding and overshooting”.  However, given the lower FII turnover as a percentage of cash as well as derivatives turnover, the regulators seem to be perplexed as to the course of action warranted. 

 The background

 An FII means an entity established or incorporated outside India , which proposes to undertake investment in India ; while an FII sub-account includes those foreign corporates, foreign individuals, institutions, funds or portfolios established or incorporated outside India on whose behalf investments are proposed to be made in India by an FII. The categories of investors such as Pension Fund, Mutual Fund, Investment Trust, Asset Management Company, Bank, Nominee Company and Incorporated / Institutional Portfolio Manager or their Power of Attorney holder (providing discretionary and non-discretionary portfolio management services), university funds, endowments, foundations and charitable institutions. They have been allowed to invest in the domestic financial market since 1992; the decision to open up the Indian financial market to FII portfolio flows was influenced by several factors such as the disarray in India 's external finances in 1991 and a disorder in the country's capital market. Aimed primarily at ensuring non-debt creating capital inflows at a time of an extreme balance of payment crisis and at developing and disciplining the nascent capital market, foreign investment funds were welcomed to the country. FII inflow to India grew manifold from US $0.18 million (net, monthly) in January 1993 to about US $400 million within a year's time. Given the volatile nature of capital flows to emerging markets seen in the early 1990s and the nature and growth of such flows to India , FII investment in India , obviously called for special regulatory attention. Investment by FIIs in India is jointly regulated by Securities and Exchange Board of India (SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the Reserve Bank of India through Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999. The promulgation of legislation pertaining to foreign investment by SEBI in 1995 marked a watershed for FII flows to India , this led to a significant increase in the level of FII equity inflows in the pre-Asian crisis period. The SEBI FII Regulations and RBI policies are amended and modified from time to time in response to the gradual maturing of the Indian financial market and changes taking place in the global economic scenario.

 Role of FIIs In Indian Financial Markets

 FIIs are allowed to invest in: a) securities in primary and secondary markets including shares, debentures and warrants of companies, unlisted, listed or to be listed on a recognized stock exchange in India; b) units of mutual funds; c) dated government securities; d) derivatives traded on a recognized stock exchange; and e) commercial papers. The investment limits on equity investments by FIIs/ sub-account are: a) FII, on its own behalf, shall not invest in equity more than 10 per cent of total issued capital of an Indian company. b) Investment on behalf of each sub-account shall not exceed 10 per cent of total issued capital of an India company. c) For the sub-account registered under foreign companies/ individual category, the investment limit is fixed at 5 per cent of issued capital. These limits are within overall limit of 24 per cent / 49 per cent  / or the sectoral caps a prescribed by Government of India / Reserve Bank of India .  

 Offshore Derivatives/Participatory Notes

  FII/sub-account may issue, deal in or hold off-shore derivative instruments such as Participatory Notes, Equity Linked Notes or any other similar instruments against underlying securities, listed or proposed to be listed on any stock exchange in India .

 The entities that can subscribe to the PN are : a) Any entity incorporated in a jurisdiction that requires filing of constitutional and/or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction; b) Any entity that is regulated, authorised or supervised by a central bank, such as the Bank of England, the Federal Reserve, the Hong Kong Monetary Authority, the Monetary Authority of Singapore or any other similar body provided that the entity must not only be authorised but also be regulated by the aforesaid regulatory bodies; c) Any entity that is regulated, authorised or supervised by a securities or futures commission, such as the Financial Services Authority (UK), the Securities and Exchange Commission (Sub-account), the Commodities Futures Trading Commission (Sub-account), the Securities and Futures Commission (Hong Kong or Taiwan), Australian Securities and Investments Commission (Australia) or other securities or futures authority or commission in any country , state or territory ; d) Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange (Sub-account), London Stock Exchange (UK), Tokyo Stock Exchange (Japan), NASD (Sub-account) or other similar self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self- regulatory organizations are ultimately accountable to the respective securities / financial market regulators. e) Any individual or entity (such as fund, trust, collective investment scheme, Investment Company or limited partnership) whose investment advisory function is managed by entity satisfying the criteria of (a), (b), (c), or (d) above.

 Rapid increase in the number

 There has occurred a sudden increase in the number of FIIs registered during 2005.

 The number, which had increased from 527 as on end March 2001 to 540 in March 2004, jumped to  739 as on end July 2005 and further to 764 as on end August 2005 (Table1).

 Traditionally, most of the institutions registered as FIIs have been from United States of America (Table 2) and the United Kingdom . Though the trend continues, the registration of FIIs from countries like Denmark , Italy , Belgium , Canada , Sweden , Ireland , etc., went up in 2004-05. Category-wise, foreign institutional investors such as mutual funds, investment trusts, managers of such funds, banks have been in dominance. In the current year, foreign pension funds, widely accepted as long-term investors, showed increased interest in Indian securities markets and many of the got registered as FIIs. Some of the important pension funds, registered during the financial year as FIIs were CalPERS, UN Employees’ Pension Fund, General Motors Employees’ Fund , US State government Pension Funds, Commonwealth of Massachusetts Pension Reserves Investment Trust , Public School Retirement System of Missouri, Lonmodtagernes Dyrtidsfond, Stiching Gemeenschappelijk Beheer En Administratie Beroepspensioenfondsen Artsen, etc.

 Size of FII investments 

 From a modest beginning in 1992-93, at Rs 13 crore FIIs’ net investment rose to Rs 8,574 crore in 1996-97 and Rs 5,957 crore in 1997-98, but it was followed by a net outflow to the extent of Rs 1,584 crore in 1998-99. Following the IT boom, the FIIs reinvested a record amount of Rs 10,122 crore in 1999-00 and sizeable investments continued upto 2001-02. But due to bust of the boom, FIIs investments fell to Rs 2689 crore in 2002-03, but what followed has been explosive; the inflows have risen to unprecedented levels in 2003-04 and 2004-05 of Rs 45,765 crore and Rs 45,881 crore, respectively. It is expected that the inflows in 2005-06 would surpass the earlier levels (Table 3).  

The FIIs have been permitted to trade in derivatives market since February 2002. The cumulative FII investment in derivatives was Rs. 1,52,970 crore as on March 31,2005. Open interest position of FIIs in single stock futures was 59.0 per cent by end March 2005 followed by index futures (29.7 per cent). The share in index option was 10.9 per cent whereas the lowest investment was in stock options (0.4 per cent).

Instrument-wise breakup of FIIs’ turnover in derivatives market shows that they account for a little less than 30 per cent of the total derivatives turnover. Index futures seem to be the most favoured investment option as compared to the others (Table 4, 5,6 and 7). Despite stock futures accounting for more than 60 per cent of the total stock futures’ turnover, they don’t appear to be very active, as they constitute only 16 per cent.  FII position limit in all index futures contracts on a particular underlying index shall be Rs. 250 Crore or 15 per cent of the total open interest of the market in index futures, whichever is higher, per exchange.

Likewise, FII position limit in all index options contracts on a particular underlying index shall be Rs. 250 Crore or 15 per cent of the total open interest of the market in index options, whichever is higher, per exchange.

The FII position limits in a derivative contract on a particular underlying stock

i.e. stock option contracts and single stock futures contracts are:

• For stocks in which the market wide position limit is less than or equal to Rs. 250 Cr, the FII position limit in such stock shall be 20 per cent of the market wide limit.

• For stocks in which the market wide position limit is greater than Rs. 250 Cr, the FII position limit in such stock shall be Rs. 50 Cr.

        FIIs shareholdings

The data on FII holdings in the companies reveals that they have increased their holdings quiet substantially in past couple of years. In case of ICICI, following the permission to the FII to invest upto 49 pert cent in private banks, FIIs have increased their holdings in ICICI Bank to 44-47 per cent (Table 8).

As compared to FII investments, mutual funds do not show such a sharp rise in their shareholdings in individual companies (Table 9).

International Experience

 East Asian Crisis

 The impact of the East Asian crisis which materialized in the middle of 1997, and the subsequent turbulence that swept the world’s financial markets over the next 12-18 months, has been significant not only in terms of the financial, economic and social consequences that these events wrought on emerging market economies, but also in terms of drawing the world’s attention to outstanding issues concerning capital flows as well as the structure, operation and regulation of the international financial system. Causes of the crisis remain among the most contentious issues and continue to be debated at the academic as well as policy levels. The Emerging Markets Committee of International Organisation of Securities Commission (IOSCO) identified multiple causes of the East Asian crisis. The Committee also made a reference to the role played by some hedge funds: “complex trading strategies involving futures were thought by some authorities to have exerted a destabilizing influence on market performance in their jurisdictions. Currency speculators pursued a so-called “double play” aimed at playing off the Hong Kong currency board system against the administration of stock and futures markets.” However, subsequent research could not produce robust evidence implicating the hedge funds for precipitating the crisis. Researchers have, however, attributed the negative public perception of the role of hedge fund managers in crisis partly to the limited information available about what they actually do.

 Long Term Capital Management (LTCM)

 Another major financial crisis involving a large hedge fund was that of the huge loss (US $4 billion) suffered by LTCM in 1998. LTCM built its positions on sophisticated arbitrage trading strategies. In addition, it used a significant degree of leverage to increase its expected return. In August and September of 1998, as the global financial crisis worsened, it became clear to LTCM that many of the assumptions inherent in the arbitrage positions it held were incorrect. Due to LTCM’s leverage (which at one point exceeded 50 to 1), those incorrect assumptions resulted in substantial losses for the firm and eroded its capital base. Liquidation of LTCM’s positions could have potentially disrupted the financial markets, resulting in losses for other participants in those markets. Finally, a consortium of banks worked out a rescue plan facilitated by the Federal Reserve Bank of New York, but acknowledged that LTCM’s potential impact on the world’s financial markets raised legitimate questions about the activities of hedge funds in general, as well as the proper role that regulators should play with respect to those activities. However, they also asserted that it was too soon to tell whether LTCM’s investment strategies represent the norm in the hedge funds industry or, whether LTCM was an overly aggressive player among otherwise responsible market participants.

 In response to the near collapse of LTCM, the Technical Committee of the IOSCO, formed a special Task Force on Hedge Funds and Other Highly Leveraged Institutions to address regulatory issues relating to the activities such of highly-leveraged institutions (HLIs) or hedge funds. The Committee in its report underlined that HLIs, like other institutional investors, can provide benefits to global financial markets. It also highlighted the combination of characteristics typically associated with HLIs such as significant leverage, and the legal and other uncertainties arising out of the extensive operations in offshore centers posing particular challenges, which need to be managed carefully in order to avoid risks to the financial system. The committee, as a defence against systemic risk in the market, recommended strong and prudent risk management processes at the regulated firms with which the HLIs trade. The Committee also highlighted the importance of transparent disclosure by the regulated entities dealing with HLIs and HLIs themselves on a voluntary basis, as a means to maintain market integrity. In spite of occasional negative perception about the role of hedge funds, such perceived misdemeanors by certain hedge funds have been considered more as occasional aberrations than general industry wide behaviour. This is also corroborated by the fact that many jurisdictions are gradually opening up their markets for hedge funds to establish and market their products.

 However, Alan Greenspan, chairman of the US Federal Reserve, lauds the basic objective of hedge fund strategy. Though they make extensive use of short positions, leverage and derivatives, they would normally be involved in an arbitrage strategy where when they are selling a stock, they are buying another. In this process, they do an excellent job in identifying overvalued and undervalued stock and selling and buying them accordingly. “ Hedge funds have become main contributors to the flexibility of the financial system, a development that proved essential to our ability to absorb so many economic shocks in recent years”.     

 Further, for the purpose of this paper, it must be emphasized here that allowing access to offshore hedge funds to invest in India through the FII route will not provide any opportunity to them to build up leveraged position onshore as borrowing by FIIs are not allowed under the terms of RBIs’ general permission.

 The Concerns about the FIIs

 The regulators —the Securities and Exchange Board of India (SEBI) and the Reserve bank of India (RBI)—are worried about the source of large chunks of foreign money flowing into the country. Is it genuine foreign institutional investment (FII), which now sees a turnaround in the India story? Or is it domestic money being re-routed by way of PNs? Or have aggressive hedge funds decided to target the Indian market for their pump and dump moves? The known facts do not reveal much. Foreign money, under the generic head of FIIs, has pumped in over $ 9.9 billion into the Indian market this year, of which nearly $8.5 billion has been invested in equity, while the rest has gone into derivatives and debt. In fact, 25 new FIIs have been registered in recent times with multiple sub-accounts each, and nobody is quite sure about the quality of their money. At the same time, domestic mutual funds have relatively tiny net purchase positions.

Interestingly, investment through PNs and Overseas Corporate Bodies (OCBs), were exposed for their links with scamsters during the Joint Parliamentary Committee’s (JPC) investigation in 2000-01. However, the JPC allowed the investigation to drift. Though OCBs have been barred from secondary market investment, but PNs seem to have become the favoured vehicle for investment by hedge funds.

 Some brokers estimate that over half of the investment through PNs in India is by hedge funds. Almost all top FIIs, including Merrill Lynch, Morgan Stanley, Credit Lyonnais and Salomon Smith Barney issue, who are registered in India issue Participatory Notes (PN). Way back in October 2001, SEBI had asked FIIs to reveal the beneficiary owners of PNs, but there was little compliance. SEBI has recently reactivated this effort, but it is not clear whether the regulatory agency will make better headway this time, or if queries will only lead to more faceless investment companies.

Hedge funds are a favourite investment instrument for the super-wealthy, who can afford risks with some of their money. They operate like a closed club, with high value individual investments and fewer disclosures. As the name suggests, they play in the derivatives market to hedge their risk in one investment with hedging investments in others. Essentially, they look for high risk-high-return investment opportunities. They swoop down on arbitrage opportunities created by imperfect market conditions and get in and out of markets with quick short-term investments. Mahathir Mohammed attempt to save Malaysia from the impact of their exit during the 1997-98 South East Asian crisis. He called them ‘highwaymen of the global economy’. But his protestations made little difference. During the Asian crisis, Indian policymakers were smug about our insulation from global capital flows. The question before the regulators is to determine beneficial ownership and regulate their operations. But an environment that encourages free movement of capital provides little leeway for a government that has opened its doors to foreign investment.

The best that the Indian regulators can do is to work hard to ensure that India ’s hoards of black money are not re-routed to destabilise our own markets.

Issues in Regulations of FIIs

 The Reserve Bank of India , on September 16, 2003 barred the overseas corporate bodies (OCBs)[2] as a class from investing in India . This was attributed to widespread misuse of existing regulations, which OCBs allegedly committed during Ketan Parekh led scam in the Indian stock market. The Joint Parliamentary Committee probing the Ketan Parekh scam also documented these irregularities.

 Investigations into the sensex crash on Black Monday of May 2004, reveal a lacuna in the Indian stock market. Exactly one year later, on May 17 2005, the Securities and Exchange Board of India  (SEBI) issued a finding that UBS Securities Asia Limited (UBS) which is a SEBI registered Foreign Institutional Investor (FII) had carried out large scale selling orders on behalf of unidentified clients for Rs 188.35 crore to whom Participatory Notes (PNs) were issued.  PNs are issued only in favour of regulated foreign entities and they are not permissible to be issued to an Indian or other restricted entity. This is intended to prevent Indian promoters from purchasing shares of their own companies and using these PNs as a tool for market manipulation. PNs are issued in compliance with KNOW YOUR CLIENT (KYC) requirements issued by SEBI, wherein the names of ultimate beneficiaries of the PNs should be disclosed when demanded by SEBI.

In this instance, SEBI found that sale orders on May 17, 2004 by UBS were on the UBS sub account, Swiss Finance Corporation ( Mauritius ) Limited (SFCML). SFCML acted on behalf of its affiliate UBS AG, London . UBS AG got orders to sell from its clients including, Caxton International, a hedge fund, based in British Virgin Islands which alone accounted for Rs 99.05 crore worth of sales orders. Caxton International is managed by Delaware (US) based Caxton Associates, which is owned by Caxton Global , US . To find out sellers’ identity SEBI asked UBS for names of investors in Caxton International but failed to get the information. SEBI then approached Caxton International directly, but did not receive any success.

Later, SEBI approached American stock market regulator, the Securities and Exchange Commission (SEC) for agreement between UBS and Caxton International in order to identify the investors. The agreement revealed Indian names. The investigation also exposed how Indian money was routed from India to Mauritius, London, British Virgin Islands, US and re-entered the country as foreign money through PNs. SEBI has banned UBS, its affiliates and agents from renewing or rolling over any of the PN’s issued against the positions held by it in Indian securities for a period of one year. It has also launched an investigation into the affairs of certain other entities for similar dealings. The investigations might help SEBI to arrive at a more permanent solution to the misuse of PNs.  There are many problems in the regulations governing PNs in India . There are difficulties in the international market in identifying the ultimate beneficiaries of PNs. Many a times PNs are held indirectly with an account holder of the clearing systems through a chain of intermediaries and sub- custodians. Many countries have imposed restrictions on certain types of investors investing in certain product by placing selling restrictions on the purchase or counter party as a condition to the transfer of PNs.  KYC requirements are directed at investors for investigation of the funds but generally they are not able to influence the daily decisions. Rather the investment manager and/ or adviser takes these decisions.  FIIs owe a duty of trust and confidentiality to their clients and counter parties. This was again a major problem faced by SEBI during its investigation in the UBS case. Greater disclosures and sound methods are required, not all types of money should be allowed to flow in India . SEBI needs to urgently regulate the laws relating to PNs.

 SEBI and RBI at loggerheads

 The RBI governor in January hinted at the dangers of an unrestricted flow of foreign funds and wondered whether imposition of quantative restrictions was one of the options that should be explored in the interest of market stability. The finance minister reacted immediately against placing restrictions on the inflows.

Hedge Funds

Financial derivatives are usually the favorites investment vehicle of hedge funds. But their investment in the Indian derivatives market is a small percentage of their total exposure. Strict, marketwise trading limits imposed by the major exchanges is probably a deterrent. But it hasn’t stopped the brokerage community to lobby with the regulators to permit the entry of pure US hedge funds in India . Relatively less vigorously-regulated equity markets like India ’s, which are prone to rigging and manipulation, are the ideal hunting ground for the short-term operations of hedge funds. The worry is that hedge funds may be providing a cover for Indian scamsters; or are being advised on investment opportunities by such discredited brokers and market operators. After all, these funds operate exactly like the big bull operators who caused massive losses to investors when their artificial rallies collapsed. But the good news is that hedge funds are just as likely to go bust when their risky investment strategies fail. According to one estimate, nearly 20 per cent of global hedge funds have failed, either due to operational failures or bad investment decisions. The danger is that disguised as global hedge funds they could destabilise the market and the economy if they exit India by ruthlessly dumping stock.

Hedge Funds in India

With the notification of SEBI (Mutual Fund) Regulations 1993, the asset management business under private sector established itself in India . In the same year SEBI, also notified Regulations and Rules governing Portfolio Managers who pursuant to a contract or arrangement with clients, advise clients or undertake the management of portfolio of securities or funds of the client. However, on account of limited convertibility, offshore hedge funds have yet to offer their products to Indian investors within India .

 Recently, RBI through liberalized remittance scheme, allowed resident individuals to remit upto US $ 25,000 per year for any current or capital account transaction. The liberalized scheme will allow Indian individual investors to explore the possibility of investing in offshore financial products. Considering the existing limit being only US $ 25,000 per year, Indian market may not be attractive to hedge fund product marketing. As long as there will be restriction on capital account convertibility, foreign hedge funds, by virtue of their minimum investment limit being $ 100,000 or higher, do not seem to be excited to access investment from Indian investors in India .

 Some hedge funds have invested in offshore derivative instruments (PNs) issued by FIIs against underlying Indian securities. Through this route hedge funs can derive economic benefit of investing in Indian securities without directly entering the Indian market as FIIs or their sub-accounts. Through recent amendments to the FII Regulations (Regulation 15A and 20 A), the regulatory regime has been further strengthened and periodic disclosures regime has been introduced. As at the end of March 2004, total investment by hedge funds in the offshore derivative instruments (PNs) against Indian equity, is Rs. 8,050 crore which represents about 8 per cent of total net equity investments of all FIIs. On the basis of market value, the hedge funds account for about 5 per cent of the market value of the total assets held by the FIIs in India .

 Relevant Provisions of FII Regulations: Though hedge funds are not an excluded category of foreign institutional investors under the SEBI (FII) Regulations, 1995 they are, however, by virtue of not being regulated by securities regulators in their place of incorporation or operations, cannot come as FII under the present provisions of SEBI (FII) Regulations. Regulation 6 (i) (b) of the FII Regulations requires an FII applicant to be a regulated entity in its place of incorporation or operations. The FII Regulations allow sub-accounts sponsored by registered FIIs to invest in India . Regulation 2 (k) defines “sub-account” which “includes foreign corporates or foreign individuals and those institutions, established or incorporated outside India and those funds, or portfolios, established outside India, whether incorporated or not, on whose behalf investments are proposed to be made in India by a foreign institutional investor”. Further, provisions of the regulation 13 lay down the conditions and procedure for granting registration to a sub-account of an FII. Hedge Funds of almost all variations can meet the requirements of sub-accounts if they are ‘fit and proper’ persons. However, based on (an internal administrative decision) if an applicant indicates in the application that it is a hedge fund, the consideration of the application is withheld. Since granting of registration to FII/sub-accounts is based on the disclosure of details and on the undertaking given by the applicant in the application form, it could be possible that a few entities who described their activities in the application form in terms other than hedge funds could have already got registration as sub- accounts. However, it must be remembered that all sub-accounts have to be sponsored by registered FIIs who are required to be regulated entities by the relevant regulators in their home countries.

 Ashok Lahiri Committee Recommendations

 Following the announcement by the Government in the Budget 2002-03 that suggested that foreign institutional investors’ (FII) portfolio investments would not be subject to the sectoral limits for foreign direct investment except in specified sectors, a Committee was constituted with representation from the Department of Economic Affairs as well as the Department of Industrial Policy and Promotion.

The recommendations are as follows:

 A. (i) In general, FII investment ceilings, if any, may be reckoned over and above prescribed FDI sectoral caps. The 24 per cent limit on FII investment imposed in 1992 when allowing FII inflows was exclusive of the FDI limit. The suggested measure will be in conformity with this original stipulation. (ii) Special procedure for raising FII investments beyond 24per cent upto the FDI limit in a company may be dispensed with by amending the relevant SEBI (FII) Regulations. (iii) In order to provide dispersed investments and prevent concentration, the existing limit of 10per cent by a FII in a single company may continue. Recommendations in para A above would apply, in general, to all sectors. Specific recommendations are being made for the following sectors with   overall composite caps:

a. Telecom services.

b. Defence production

c. Public sector banks.

d. Insurance companies.

 FII investments are currently not permitted in print media, sectors which are not yet opened for private investment and in gambling, betting, lottery. The Committee recommends the same may continue. FDI investment in retail trading is prohibited. FII investments, however, are permitted up to 24 per cent in all listed companies, except in print media companies.  The Committee recommends the same may continue as this would help in developing supply chains in a wide range of products including that of agriculture.

 Conclusion

  Though the FIIs are operating within the stipulated limits prescribed by the regulators and also as they do not account for a large part of the turnover, they may nevertheless pose a threat to the stability of the domestic market if all of them choose to exit the market at a one single point of time thereby spreading the containgion effect. However, this fear remains one of the most profound fears of all financial systems in the world financial markets. Concern on liquidity is not the only constraint in restricting FII entry into the markets; it gets interwined with the stance of policy on reforms and opening up. The government is generally forced to keep up the image of a liberal and open economy. Notwithstanding such compulsions, the regulators and the government cannot neglect the need to investigate the sources of FII funds on a priority basis and make this information public. Particularly, the hedge funds need some regulations at the national level. Also, in view that the unmitigated flows keep influencing the economic policies, placing some moderating influence on them may not be unrealistic and it may not even conflict the overall policy of external sector liberalization. Such a restraining influence may take the form of say, a 10 percentage point increase in taxation on both short-term and long-term capital gains booked by FIIs on their investments in domestic stock exchanges. In the ultimate analysis, what is to be recognized is that FII kinds of capital flows are least productive as compared to FDI flows, which tend to augment productive capacities in the economy along with contributing to better technology and managerial practices.

 Reference:

SEBI: FII hedge fund.PDF

Dalal Sucheta (2003): Regulators on the alert over market manipulation, Indian Express, July 21.

       (2005): Government fiddles while the market is manipulated, www.suchetadalal.com,

      August 21.

Gosh D.N. (2005): “Danger of Hedge Funds:FII Inflows and Regulatory Helplessness”.EPW, August 20.

EPW (2004): Money Market Review, April.

(This note was prepared by Piyusha Hukeri, while tabulations were done by Nileshwari Engineer.)

Highlights of  Current Economic Scene

AGRICULTURE 

o       Sowing of oilseeds in India has been slow during 2005 owing to irregular rains during the monsoon months of Jun-Aug 2005. Oilseed sowing has been completed in an area of 16.08 million hectares as on August 20, 2005 compared to 16.64 million hectares as on August 20, 2004. Sowing of sunflower and groundnut have been completed in the main growing states of Gujarat and Maharashtra but is still continuing in some other regions namely Andhra Pradesh, Karnataka and Tamil Nadu following widespread rains in the first fortnight of Aug 2005. Decline in area under soybean coverage was mainly on account of lesser coverage in Madhya Pradesh and Karnataka, where rainfalls were delayed.

o       In spite of belated onset of Monsoon and excessive monsoon in Gujarat, Maharashtra and other few parts of the country, the overall monsoon situation in the country seems to be quite normal. The earlier apprehensions about shortfall in kharif sowing owing to late rains have been belied. The total sown area in the country is now estimated at 89.9 million hectares, marginally lower compared to the last year’s 90.2 million hectares. The cumulative monsoon rainfall has been normal and well distributed in most parts of the country. The total rainfall in current season so far is deemed 2 per cent below normal in the country as a whole. The total storage of water in 76 major reservoirs is 38 per cent higher than last year’s corresponding position and 37 per cent above the past 10 years’ average.

o       Exports of Spices during April-July 2005 declined by Rs. 101.49 crore in value terms and 15,996 tones in quantity. The total exports during this period stood at 1,13,854 tonnes valued at Rs 695.09 crore as against 1,29,850 tonnes worth Rs. 796.58 crore in April – July 2004-05. Although prices of Turmeric and Garlic have maintained a rising trend, a drop in Chilli, coriander, cumin, celery, fennel, other seeds, vanilla mint products etc. has lead to the overall decline 

INFRASTRUCTURE

·        Index of Infrastructure

o       The index of infrastructure industries, released midweek, reports a sharp decline in cumulative growth of core infrastructure industries during April-July 2005-06 at 4.2 per cent against 8.9 per cent during the corresponding period previous fiscal year.

o       Core sector growth has been pulled down to 0.5 per cent during July 2005 as compared to the corresponding month last fiscal year. This is the second lowest growth rate in the core sector in over a year; the sector witnessing a negative growth rate of 0.6 per cent in the February 2005.

o       The overall slowdown in the infrastructure index manifested itself in all six-core sectors, with production of coal, power generation and crude oil recording negative growth rates; steel displaying a sharp decline; while growth in cement and refining sectors slowing down marginally in July 2005.

o       The government gives the core sector a thrust in outcome budget with key decisions like aircraft acquisitions for state run airlines, public private partnerships for nine infrastructure projects and highway development programme being given due attention.

·        Electricity

o       According to the index of infrastructure industries, power generation registered a negative growth rate of 1.3 per cent in July 2005 as compared to robust growth of 13.6 per cent in the same month last fiscal year.

·        Coal

o       The index of infrastructure industries reports a fall of 1.7 per cent in coal output in July 2005 against a growth of 7.5 per cent in the same month last fiscal.

o       Centre has identified 101 new coal projects to increase coal production to bridge widening demand supply gap during 10^th plan, out of which 22 are already producing coal and 45 are slated for production during 205-06 and 2006-07.

·        Petroleum and Petroleum Products

• The index of infrastructure industries recorded a 4 per cent dip in crude production during July 2005 compared to 0.2 per cent growth during the same month a year ago, and a marginal slow down in refining sector growth at 3.6 per cent from 3.8 per cent.

• Upward pressure on oil prices continues through the week, with oil prices surging to a record high of $ 68 a barrel around mid-week, attributable to both real and anticipated global supply disruptions of oil as well as depletion of US gasoline stocks.

• Both, finance minister P Chidambaram and Planning Commission deputy chairman Motek Singh Ahluwalia have made it clear that there is no alternative to a fuel price hike, given the skyrocketing international oil prices.

• The outcome budget laying special emphasis on enhancing existing oil production in the country has set aside a massive outlay of Rs 21106.46 crore for 2005-06 towards undertaking exploration and production activities. It is also expecting an incremental reserve accretion of 49.95 million tonne of oil equivalent by new hydrocarbon finds as also by acquiring oil and gas equity abroad.

 ·        Non-Conventional Energy

• Jatropha holds potential to emerge as a clean fuel option in India with its capacity to thrive in wastelands, given that 33 million hectare of wastelands in the country are available for reclamation coupled with estimates that a 10 million hectare crop of jatropha could yield 30 million tonne of oil a year.

• Maharashtra government has released a policy for non-conventional energy sources to support its efforts in tapping a potential of 6480.47 MW of energy from such sources, broadly covering the following aspects: addressing the problem of land utilisation by wind power projects by entitling wind farm promoters to acquire tribal lands on a 30-year rental basis; promoting production of bio-diesel by bringing 22.32 hectares of barren land under jatropha cultivation and giving it to promoters of bio-diesel projects on a rental basis; encouraging projects based on industrial waste, hospital waste and also tidal waves.

 ·        Steel

• As per the index of infrastructure industries, growth in finished steel production dropped to 3.7 per cent in July 2005 as against an impressive 17.2 per cent in July 2004.

• Though global steel prices have been rising sharply in global markets for last four weeks, the sustainability of this good run for the steel industry is questionable as the price rise is said to be a result of supply cuts and not so much due to rising demand.

 ·        Cement

• As per the index of infrastructure industries, cement output grew only marginally at 2.3 per cent in July 2005 as compared to 8.4 per cent in the corresponding month last year.

 ·        Shipping

• The outcome budget projects a total expenditure of Rs 746.71 crore during 2005-06 for development of 12 major ports, with Rs 656.71 crore being raised through internal resource generation and external borrowing and Rs 90 crore through gross budgetary support.

• As per the outcome budget for ministry of civil aviation, the government will grant final approval to the long pending fleet acquisition plan of Indian Airlines and Air India in the current fiscal year, 2005-06, with total budget allocation for this sector amounting to Rs 2379.32 crore.

 ·        Roads

• Road transport and highways department seeks additional budgetary support of Rs 30000 crore for financing new phases of the National Highway Development Programme (NHDP), to be used for land acquisition and clearing of utilities as well as providing viability gap assistance for build-operate-transfer projects.

• The ministry of road transport and highways, has announced completion of Golden Quadrilateral project, the first phase of NHDP by December 2006, whose original deadline was December 2005 as well as projects completion of second phase, NSEW, by its official deadline of December 2007, which is commented to be near unachievable given the current scenario.

·        Railways

• The setting up of Railway Land Development Authority has been approved by the Parliament, allowing commercial utilisation of vast tracts of vacant railway land across the country. The railways ministry proposes to utilise 43 lakh hectares of vacant land to generate additional income for better amenities and improving safety in the railways.

INDUSTRY

·         Pharmaceuticals

• Indian pharma majors are bullish on European drug firms as a risk diversifying measure in reaction to their suffering from reverses in the US generics markets with price erosions up to 95 per cent in certain drugs segments.

• Cabinet approves de-licensing of manufacturing drugs from DNA technology and from specific cell tissues, which were till date included under list of industries requiring compulsory industrial licensing under the category of hazardous chemicals under the Industries (Development and Regulation) Act of 1951[1].

 ·         Paper

• The total market for coated paper in India is to the tune of 275000 tonne per annum, with an annual growth rate of 15 per cent and huge untapped market potential since use of coated paper in writing and printing segment is of the order of 10 per cent in India while the global standard is 40 per cent.

 ·         Small and Medium Enterprise (SME)

o       Confederation of Indian Industries (CII) has proposed to take up seven new SME cluster projects in Hyderabad, Bangalore, and Tamil Nadu by April 2006, in addition to the existing three clusters in Ambattur and Coimbatore in Tamil Nadu, with a view to enhance internal competitiveness, of SMEs, in terms of cost management, energy management and manufacturing excellence.

 ·         Mining

• The Centre has decided to set up a panel to review monopoly norms under Rule 22 D of the Minerals Concession Rules of 1960[2] related to grant of mining permits of 67 major minerals that are covered under the restrictions, since private companies engaged in mining were finding specifications restrictive.

 ·        Textiles

• The government has allocated a sum of Rs 450 crore in 2005-06 for technology upgradation funds scheme (Tufs), in a bid to provide adequate impetus to the textile and jute industry by way of interest reimbursement and capital subsidy. Also, apparel parks for exports (APE) and textile centres infrastructure development scheme (TCIDS) have been allocated a sum of Rs 100 crore each. In addition, an outlay of Rs 100 crore has been allocated to the technology mission on cotton (TNC).

CORPORATE SECTOR

• Anil Ambani owned Reliance Energy Limited has approached Gail limited to supply gas to its 4,000-mega watt power plant at Dadri in Utter Pradesh.

• Private oil companies Reliance industries limited, Essar oil and Shell India have sought the government’s permission to enter in the aviation turbine fuel (ATF) marketing.

• Tata Steel has decided to set up a 10 mt per annum capacity steel plant at Jharkhand. Its Jamshedpur plant which is of 5 mt capacity at present, is expected to become 7 mt by 2008, as the work has already begun.

• Tata Auto components limited, a Tata Motors subsidiary, has decided to acquire Germany based Wundsch Weidinger, a company that produces functional plastic parts and systems.

• Godrej and Boyce manufacturing company’s Rs 500 crore appliances division has planned to enter the full line consumer electronics segments and may launch its colour televisions in the Indian market in 2006.

• Reliance Industries limited is planning to enter in the bio-fuel segment. The company has put aside 200 acres of land at Kakinada in Andhra Pradesh to cultivate jatropha, which can yield high quality bio diesel.

• Indian Oil Corporation will upgrade its Koyali refinery in three years to increase the proportion of sour crude to 58 per cent from 20 per cent.

• Bharti Tele-Ventures has entered into a Rs 580 crore deal with Nokia to expand its network in eight circles. The expansion would double Bharti’s network capacity.

• Reliance Capital limited would acquire 15 per cent equity shares in Spanco Telesystems and Solutions (STS) for Rs 32.3 crore. STS is a telecom solutions provider and is also into call centre services, with operations in four locations in India .

• Bharti Enterprises has announced its foray into the financial sector in partnership with AXA the world’s largest insurance group. Bharti AXA life insurance, a 74:26 joint venture between the Indian and the French group has committed investments of Rs 500 crore to its insurance venture over the next three to four years. They both have decided to enter the pension and mutual fund business in the coming months.

• S Kumars Nationwide Limited has planned to invest Rs 400 crore over the next four years for expansion. The company has decided to increase the number of showrooms from 16 to 200 and retail outlets to 11,000 from existing 5,800, by 2008.

• Gujrat Ambuja Cement limited has completed acquisition of 14.9 per cent shares in ING Vysya life insurance from ING Vysya Bank.

• HCL technologies quarter four net profit has fallen to 19.3 per cent to Rs 162 crore while revenues rose 25.7 per cent to Rs 927 crore for the year ended June 2005.

HOUSING

o       The National Housing Bank (NHB) has cancelled the registration certificate of SBI Home Finance Ltd. with immediate effect as the company was suffering huge losses since the past several years and its net owned fund is negative and its total liabilities exceed its total assets and has closed down its branches.

INSURANCE

o       Bharti Enterprises and Axa, the largest insurance in the world have entered into a joint venture to foray into the life insurance market in India . The new entity Bharti Axa Life Insurance Company Ltd., which would be a 74:26 joint venture, has decided to invest Rs.500 crore into the business over three years. Axa and Bharti are also looking to enter the mutual fund and pension sectors at a later stage.

o       In a circular to the insurance and re-insurance companies, the Insurance Regulatory and Development Authority (Irda), has said that insurers and intermediaries would be barred from infusing capital through the issue of preference shares or any other hybrid instruments other than equity shares. The circular has also been sent to third party administration and brokers. Irda had received several queries from insurance companies and intermediaries clarifying whether they could issue preference shares or certain other forms of hybrid instruments to raise their respective capital base. The regulator has warned that it would take immediate steps in case this was violated. Under the Insurance Act, 1938, no public company limited by shares would be allowed to carry on life insurance business unless it is paid up capital, consists of only ordinary shares of which has a single face value. Notably, the rules also apply to general insurance companies. Insurance companies are allowed to raise additional capital through infusion of equity capital at periodic intervals. Irda also said that no insurer shall register transfer of its shares where, after the transfer, the total paid up holding of the transferee is likely to exceed 5 per cent of its paid-up capital or where the transferee is a banking or an investment company and is likely to exceed 2.5 per cent of such paid-up capital, unless prior approval to the authority has been obtained. The regulator, in the circular, underlined that such transfers should also include renunciation of the rights by the existing shareholders.

INFORMATION TECHNOLOGY

o       The National Association and Services Companies (Nasscom) have launched Nasscom Quality Forum to promote quality initiatives in the Indian IT industry. The forum aims to promote a culture of quality consciousness in the industry to enhance its international competitiveness. Apart from undertaking research reports, preparing handbook on best practices on quality etc, the forum will also work with premier institutions in the field of quality and education to promote quality initiatives in the IT sector. Currently, India has over 89 companies at the SEI CMM and CMMI Level 5 assessment. Around 275 Indian software and BPO companies have acquired quality certification.

o       Chennai headquartered Human Resources BPO firm, Secova eServices has received venture lending – a hybrid form of venture capital, which has larger debt portion and a smaller equity part – to the tune of Rs.6.5 crore from Citigroup. The lending made by Citigroup India ’s corporate investment bank division, has been structured as a three-year term loan with an additional pledge of stock warrants.

FINANCIAL MARKETS

 ·        Capital Markets

 §         Primary Market

• Sebi has modified the book-building process by introducing changes for the Qualified institutional buyers (QIBs). It has been decided that:

 1.      QIBs shall bring at least 10 per cent margin while submitting the bids.

2.      The allotment of shares to QIBs shall be on proportionate basis.

3.      Out of the existing 50 per cent portion available for QIBs, 5 per cent  thereof shall be specifically available for Mutual Funds registered with SEBI. However, these Mutual Funds participating in QIB category will also be eligible for allotment in the remaining portion, i.e 45 per cent  available to QIBs.

§         Secondary Market

o       The 16-week rally came to a halt this week with the benchmark indices closing in the red. After the Sensex and the Nifty having gained 24 per cent and 23 per cent respectively over the last 16-weeks, they ended the current week with a loss of about 1 per cent each.

o       Despite international crude oil prices showing no signs of easing, oil marketing major, BPCL, was the top gainer this week seemingly on the back of the news that the government is contemplating raising fuel prices soon. This would help ease the pressure on margins of oil marketing companies as crude oil, which is the input for these companies, has been hovering around the US$ 68 per barrel mark now.

o       During the week, the net investments in equities by mutual funds have exceeded that of FIIs; mutual funds have invested Rs 791 crore while FIIs have invested only Rs 189 crore.

o       Despite the sharp rise in the combined turnover of BSE and NSE, the average contribution of FIIs has fallen from 29.07 per cent in June to 24.08 per cent in July and has further slipped to 22.98 till August 21.

o       Dr Kirit Somaiya, president, Investors’ Grievances Forum, has lodged an official complaint against the Sebi whole time member Mr Madhukar for his statement over the BSE sensex touching 16,000 in a year. He has accused Mr Madhukar of violating Sebi guideleines under Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 and Sebi Act, 1992.  

§         Regulations

o       Presently listed companies are required to maintain their public shareholding at a level that was required at the time of initial listing. The minimum public shareholding requirement, therefore, varied in accordance with the provisions applicable at the time of initial listing of the company. This has been revised as follows:

1.                  All listed companies will be required to maintain at least 25 per cent shareholding with public for the purpose of continuous listing.

2.                  This will not, however,  be applicable to companies which are permitted to make an Initial Public offer (IPO) of at least 10 per cent public in terms of Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 (SCRR). Such companies will be required to maintain at least 10 per cent public shareholding for the purpose of continuous listing.

o       Sebi has suspended all kinds of trading on the Magadh Stock Exchange after finding it prima facie guilty of commencing trading without getting the required clearances from the market regulator. 

·        Derivatives                                  

o       The Nifty Futures one month contract during the week moved within a range of 2315 to 2360. The nifty futures began the week with a 13-point discount, which during the course of the week narrowed down to one point; as a lot of short positions were closed out as participants expected the market to recover and there was a significant built-up in fresh long-positions, as a result, the discount narrowed. The daily average turnover ranged between Rs 16,000 crore to Rs 18,000 crore.

·        Government Securities Market

§         Primary Market

o       The RBI sold 11.90 per cent 2007 for a notified amount of Rs 6,000 crore under the MSS, outside the indicative calendar of issuances, in order to absorb the surplus liquidity from the system. The cut-off has been set at 6.0467 per cent.

§         Secondary Market

o       Call rates eased during the week from 5.50 –5.75 per cent to 5 –5.10 per cent as the demand for funds was low. Even the subscriptions under the RBI’s LAF have been lower during the week to around a daily average of Rs 30,144 crore as compared to Rs 34,000crore in the past week. The weighted average YTM of 8.07 per cent 2017 rose marginally to 7.21 per cent on August 26 from 7.15 per cent on August 19.  

o       In a short span of time, over 70 per cent of the trading in government securities is done through NDS-OM (Negotiated Dealing System – Order Matching) system which is without the involvement of brokers. 

·        Bond Market

o       With the interest rates firming up, the appetite for floating rate bond has waned as it introduces an element of uncertainty for both the issuers and lenders. Hence, they have come up with an innovative product, a mix of fixed and floating rates, which it is expected would satisfy both of them. During the past week, HDFC and Power Finance Corporate (PFC) have raised about Rs 1,500 crore using this hybrid product. This is the first time that market players are issuing such a dual floating rate benchmark.

·        Foreign Exchange Market

o       The rupee-dollar exchange rate depreciated to Rs 43.73 on August 26 as against Rs 43.58 on August 19 due to the month-end demand for dollars, record high oil prices and FII outflows from the stock market. Also, on account of arbitrage opportunity created due to the differences between the domestic rate and non- delivered forward (NDF) markets prompted traders to buy dollars.

o       On rumors of a revaluation of Chinese Yuan, the dollar turned volatile; but as the Chinese central bank denied the rumor and said that the Yuan’s exchange rate is being market determined and the possibility of further revaluation did not exist, the dollar stabilised. 

o       The forward premia ended sharply lower as revaluation rumors induced traders and exporters into dollar short covering. The six-month forward premia fell from 0.81 per cent on August 19 to 0.64 per cent on August 26. 

·        Commodities Futures derivatives

o       During the week, the prices of Guar seed and Guar Gum were volatile due to fear psychosis in output front  and strong speculative demand.  

o       The NCDEXAGRI index has risen from 1234.25 on August 20 to 1255.81 on August 27.

INFLATION

• The annual point-to-point inflation rate based on wholesale price index has declined to 3.13 per cent during the week ended August 13, 2005 from 3.35 per cent registered during the previous week. This rate of inflation is three-year low. The inflation rate was at 8.29 per cent in the corresponding week last year.

o       The WPI has remained unchanged at the previous week’s level of 194.1 (Base: 1993-94=100). The index of primary articles’ group has increased by 0.2 per cent to 191.3 from the previous week’s level of 191, mainly due to increase in the price indices of food articles. The notable development under the group ‘primary articles’ is with regard to the price indices of ‘minerals’, which declined considerably by 8.5 per cent to 266.4 from 291.3 for the previous week.  The index of fuel, power, light and lubricants group remained constant at the previous week’s level of 303.9. The heavy-weighted manufactured products’ group constituting 63.7 per cent of total weight, has declined a tad by 0.1 per cent to 170.5 from 170.6 of the previous week’s level.

o       The latest final index of WPI for the week ended June 18, 2005 has been revised; as a result both, the absolute index and the implied inflation rate remained unaltered at their provisional week’s level of 192.9 and 4.10 per cent, respectively.

o       The contained rate of inflation during last two months, i.e. June and July including the first two weeks of August is attributed mainly to the high base effect. The same trend is expected to prevail upto the end-August, provided the government does not hike oil prices significantly.

LABOUR

o       The government is planning to introduce two new bills for workers in the unorganised sector, namely National Minimum Social Security Cover Bill, 2005 and Conditions of the Work and Livelihood Promotion Bill, 2005. Out of these two, the first would take care of provision of social security to these workers and the other would focus on their work conditions and livelihood promotion. The proposed two bills would replace a single bill drafted by the previous government. The National Minimum Social Security Cover, 2005 would include around 30 crore workers in the unorgansied sector with monthly income of Rs.5,000 or below, including self-employed workers, wage workers and home-based workers. It is proposed that the workers, employers and the government would contribute equally, which would be fixed at Rs. 1 a day per person. The centre and state governments would together contribute Rs. 22,558 crore for the cover in a 3:1 ratio, which is equivalent to 0.8 per cent of GDP in 2004-05. The government also said that it is ready to pay employer’s contribution in cases of absence of employer-employee relationship. As for the workers belonging to below poverty line households, the contribution will be solely borne by the centre. The unorganised sector workers (Conditions of the Work and Livelihood Promotion) Bill, 2005 seeks to address the conditions of work for wage workers in the unorganised sector to provide a basic minimum standard on hours of work, payment of minimum wages and adherence to Bonded Labour Abolition Act. As for self-employed workers, the draft Bill has proposed number of measures for the protection and promotion of livelihoods of these workers, which include provision of credit, right to common property and natural resources, use of public space to engage economic activities and promotion of associations of self-employed workers. 

PUBLIC FINANCE

o       The empowered committee on VAT will hold a two-day meeting to discuss issues related to implementation of the new tax system, including uniform floor rate (UFR) for bullion items. Besides UFR, tax rates on processed food items, introduction of 8 per cent tax rate slab and reluctance of the eight states to introduce VAT will be discussed in the meeting.

o       Differences between the Planning Commission and the Finance Ministry had delayed the finalisation of the proposed Special Purpose Vehicle (SPV) to provide long-term debt for infrastructure projects. The Plan panel is in favour of allowing the SPV to undertake direct lending at specified interest rates and for a specified tenure. Besides, it wanted to include subordinate debt and mezzanine financing under the ambit of the SPV, which is proposed through the establishment of a new non-banking finance company. On the other hand, the Finance Ministry wants to include refinance under the SPV ambit, while taking up subordinate debt and mezzanine financing and venture capital funding for infrastructure projects later.

o       The finance ministry has asked the Planning Commission to undertake zero-based budgeting of all central sponsored schemes(CSS). Last year, the Planning Commission had reduced the number of CSS from 320 to about 190 as a part of the zero-based budgeting exercise.

o       A lower-than-projected growth in excise collections has prompted the revenue department to monitor the mop-up from the petroleum, iron and steel, cement, automobiles, tobacco products and chemical sectors so as to tighten the excise audit of companies through more careful financial analysis of production trends. The department is planning to adopt input-output norms similar to those adopted by the Directorate-General of Foreign Trade for sensitive products like iron and steel, ghutka and plastics. During April-July, excise collection rose only by 5.6 per cent to Rs. 8,590 crore, though it was budgeted to grow 20.66 per cent to Rs. 1,21,533 crore for the current fiscal year.

o       The quarterly review for April-June 2005, has revealed that the Centre’s expenditure has gone up by 4.3 per cent to Rs. 93,584 crore from Rs. 89,691 crore in April-June 2004. The Plan expenditure has increased by 5.3 per cent to Rs. 24,254 crore at the end of June 2005, while non-plan expenditure went up 4 per cent to Rs. 69,330 crore during the period. The government appeared satisfied on the receipts side with an increase in the tax financing of the expenditure. About 42 per cent of the Centre’s expenditure has been financed by non-debt receipts. Further, fiscal deficit has been estimated at Rs. 54,517 crore in April-June 2005-06, compared with Rs. 41,681 crore in corresponding period last year. The deficit at the end of June this year was 36.1 per cent of the budgeted Rs. 1,51,144 crore, compared with 30.3 per cent last year.

o       According to the quarterly review of trends in receipts and expenditure, the total transfers to state in the first quarter were Rs. 29,476 crore, of which Rs. 17,994 crore was transferred in June 2005.Collections of small savings and public provident funds, was up 6.5 per cent from Rs. 20,870.7 crore in the first quarter of 2004-05 to Rs. 22,239 crore in the first quarter this fiscal.

o       The Maharashtra state government will seek compensation of Rs. 250 crore from the Centre for less revenue generation due to VAT, for the first quarter of current fiscal. The state has collected Rs. 2,451 crore from VAT items during the first quarter, against a projection of Rs. 2,701 crore.

o       Finance Minister presented the Outcome Budget, which covered 44 ministries consisting around 61 departments. However, nine ministries and departments, including the defence ministry, the department of atomic energy, external affairs and parliamentary affairs, have not been covered given the difficulty to have monitorable and measurable outcomes in these departments. Finance Minister, further added that in future Outcome Budget will also include non-plan expenditure. The important targets listed in the Outcome Budget included the Rs. 1,500 crore public-private partnership project to be cleared by the Cabinet before September and projects likely to be sanctioned before the year end.

CREDIT RATINGS

o       Care has assigned ‘BBB’ rating to the proposed secured non-convertible debenture issue of Indowind Energy Ltd. (IWEL) for an amount of Rs. 13.38 crore. The rating is based on IWEL’s experienced management, its expertise in setting up wind farm projects, its current generation capabilities and a good operating margin.

o       The agency has also assigned ‘AA+’ rating to the tier-II bond issue of Rs. 800 crore, of Union bank of India (UBI). The rating factors in UBI’s good market position, majority ownership by government of India , moderate asset quality as well as its modest capitalisation and good profitability parameters.

o       Care has assigned a ‘A’ rating to the proposed tier-II subordinated bond issue of South Indian Bank (SIB) for an amount of Rs. 65 crore. The rating factors in the longstanding operations of the bank, relatively large branch network among old private sector bank, good IT infrastructure and a healthy advances growth with an improvement in asset profile.

o       Care has upgraded the rating assigned to the commercial paper programme of Emami Paper Mill Limited (EPML) for an amount of Rs. 10 crore to ‘PR1+’ from the existing ‘PR1’ rating. The upgradation draws strength from EPML’s satisfactory track record, experience of promoters, its leading position amoung the paper manufacturers in Eastern India , and improving profitability with high gross cash accruals and interest coverage and positive outlook of the paper industry.

o       In an another exercise, the agency has also revised its rating for the outstanding tier-II subordinated bond issue of Rs. 3.8 crore of Ratnakar Bank Limited (RBL) from ‘BBB+’ to ‘BBB’. The rating revision primarily factors in the losses suffered by the bank in FY05, resultant reduction in capital adequacy ratio and deteriorating asset quality indicated by increase in slippages. The rating also takes into account RBL’s small size of operations; low share of low cost deposits as well as its nascent risk management system.

o       Care has reaffirmed ‘A (SO)’ rating assigned to the outstanding bond issues of Sardar Sarovar Narmada Nigam Limited. (SSNNL) and Gujarat Urja Vikas Nigam Limited (GUVNL). The ratings are primarily based on the unconditional and irrevocable guarantee from the state government of Gujarat . However, the ratings do factor in the strained financial position of Gujarat government as reflected in budgetary imbalances leading to revenue deficit and high level of fiscal deficit.

o       Icra has retained the ‘A1+’ rating assigned to the Rs. 250 million commercial paper/short-term debt programme of Balmer Lawrie and Company Limited (BLCL) .The rating factors in BLCL’s diversified operations in both manufacturing and service sectors, conservative capital structure and comfortable debt service indicators leading to high financial flexibility

o       Icra has reaffirmed the ‘LAAA’ rating assigned to the long-term borrowing programme of Power Finance Corporation Limited (PFC), it has also retained the fixed deposit and short-term debt/CP rating of PFC at ‘MAAA’ and ‘A1+’, respectively. The ratings continue to reflect PFC’s sovereign ownership and its strategically important role in implementation of various schemes of government of India for the power sector.  The agency has also reaffirmed the ‘A1+’ rating assigned to the Rs. 150 million commercial paper programme of Godrej Agrovet Limited (GAVL). The rating takes into account the favourable financial risk profile of the company supported by a sustained increase in turnover and profits, healthy capital structure and comfortable liquidity position, as well as the dominant market position of GAVL in the animal feeds business.

o       Crisil has reaffirmed its ‘FAAA/Stable’ and ‘P1+’ ratings assigned to Berger Paints India Limited’s (BPIL) fixed deposit programme and Rs. 900 million short-term debt programme, respectively.

EXTERNAL SECTOR

o       The government has detected serious irregularities in the manner in which India ’s foreign trade data are being compiled. An internal investigation conducted by commerce department has brought out an alarming fact that 36 per cent of exports have been wrongly classified and quantity of 41 per cent of the export consignment data captured at ports has been wrongly reported. Similar problems have also been found in reporting import data where 11 per cent of imports have been wrongly classified and in as much as 46 per cent cases, the quantity has been wrongly reported. This poses a serious problem especially for policy makers, who rely on this data for formulating policies. One could very well have a situation where focus is put on a wrong sector based on this erroneous data.

o       Not only does India exports textile items but it has also become a major importer of textile articles. Imports, which gradually picked up with the phased dismantling of quota regime during the last three years, have shown a major surge in recent months. High value items like woven and knitted garments constitute just a small fraction of total imports. Bulk of the imports are of items in the low end of the value chain like yarn, fabric and madeups.

o       According to an assessment made by economic division of the commerce ministry, exports growth is expected to be lower in 2005-06 as compared to the previous fiscal year, despite registering a growth of over 20 per cent during the current fiscal year so far.

o       The ministry of food processing is in favour of allowing up to 50 per cent foreign direct investment (FDI) in the retail sector.

o       The government is considering creating a national export insurance account with a corpus of Rs 2000 crore.