Current Economic Statistics and Review For the Week 
Ended November 26, 2005 (48^th Weekly Report of 2005)

I

Theme of the week:

Successful Saga of Venture Capital in the USA, 
It’s Global Spread and Nascent Expansion in India

I

The Background

In the 21^st century, the world economy is increasingly driven by knowledge-based ideas, technology, innovation and global integration. Knowledge-based industries and services contribute share in the GDP of economies, employment and wealth a sizeable and growing share in national incomes and employment as well as in wealth creation in major economies across geographical and social divides. In the growth of knowledge-based industries and services, venture capital industry has made a pivotal contribution; in particular this contribution stands out in high-technology industries and in the most rapid advances facilitated in computing, software, and communications capabilities.   The role of venture capital pioneered in the advanced economies has rapidly spread to emerging markets; India ’s being in the forefront.

Scientific, technology and knowledge-based ideas when supported by venture capital can be propelled into a powerful engine of economic growth and wealth creation in a sustainable manner. Technology by itself may not be capable of creating wealth, what matters is its innovative usage. Likewise, innovative ideas by themselves are not sufficient to create successful ventures unless they are backed up by innovative as also risk-taking entrepreneurs.  A unique role played by venture capitalist or venture capital institutions is to make this chain relationship possible. In short, knowledge based innovative ideas, supported by high-tech technology, backed by entrepreneurship and distinctively funded by VC funds, may play a dominant role in  the global economy in the 21^st century. In the absence of the VC funding the entrepreneurs might have funded the ventures from other sources or simply by reinvesting self-owned  retained earnings, but in such a scenario,  innovations would have been actualised rather slowly and not always surely for want of sufficient risk-taking efforts.

Definition:

Venture Capital: By definition, venture capital is risk capital provided to an entrepreneur who has innovative ideas but no significant capital to take risk and proceed with actualising innovations over a period.

Venture capital (VC) has taken the form of providing risk the capital provided by outside sources for financing of new, growing or struggling businesses. A venture capitalist (VCs) is a person who makes such investments.  The VC system has itself advanced further with the creation of VC funds. A VC Fund is a pooled investment vehicle (often a partnership) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans. Essentially, VC addresses the funding needs of entrepreneurial companies that generally do not have the size, assets, and operating histories necessary to obtain capital from more traditional sources, such as public markets and banks.  

Some of the salient features of Venture Capital Funds are as follows:

1)      VCs finance innovation and ideas, which have a potential for high growth but with inherent uncertainties; as a result, VC investments generally are high-risk investments but at the same time they offer the potential for above average returns;

2)      Generally, VC funding is provided to new firms or in some cases in existing firms, which exhibit potential for the exploitation of innovative business ideas and for above-average growth;

3)      Usually VC finance is risk investment in small and medium-size companies; VCs do not make loans, except in cases where there are clauses guaranteeing the convertibility of the loans to equity; 

4)      Far from being simply passive financiers, venture capitalists foster growth in companies through their hands-on involvement in the management, strategic marketing, and planning of their portfolio companies; VCs themselves are entrepreneurs first and risk-taking financiers second;

5)      VC investment process consists of raising a fund, then screening, selecting, structuring and monitoring investments; finally, investments should be capable of  being sold and the original capital repaid to investors;

6)      VC firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves; and

7)      VCs are not permanent investors; they need to liquidate their investments to complete their investment cycle and move on to further investments to expand their role in the system.

How VCs invest?

VC financing is exceptionally different from traditional sources of financing.  VCs do not charge interest nor the firms pay back the capital in installments. When an investment is made, a percentage of ownership in the company is given to the venture fund in exchange for the capital provided.

Investments by a VC fund can take the form of either preferred equity stock or a combination of equity and debt obligation, often with convertible debt instruments that become equity if a certain level of risk is exceeded. The common stock is often reserved by covenant for a future buyout, as VC investment criteria usually include a planned exit event, which includes sale to public markets through an initial public offering (IPO) or acquisition by a larger company, normally within three to seven years. Additionally, in most cases, one or more general partners of the investing fund joins the Board of Directors of the new venture, and will often help to recruit personnel to key management positions

Stages in VC investments

There are five stages in the investment financing of a firm: seed; start-up; early operation; expansion; and maturity. Most venture outlays focus on the seed, start-up, early operation and expansion stages.  A tiny fraction of venture capital money, about 2 percent, goes to the earliest stage of financing, called seed money, which constitutes funds for initial research to prove a concept.  A significant portion of venture capital is invested in supporting product development and initial marketing, often referred to as start-up funds. 

Risk involved in VC financing

As mentioned above, VC investments generally are high-risk investments offering-above-average returns. In order to cash their investments, VCs sell their stocks, warrants, options, convertibles, or other forms of equity in three to seven years. Venture capitalists know that not all their investments will pay off. The failure rate of investments can be high, anywhere from 20 per cent to 90 per cent. In case a venture fails, then the entire funding by the venture capitalist is written off.

Many venture capitalists try to mitigate the risk of failure through diversification. They invest in companies in different industries and different countries so that the risk across their portfolios is minimised. Others concentrate their investments in the industry that they are familiar with. In either case, as a rough yardstick they usually work on the assumption that for every ten investments they make, two will be failures, two will be successful, and six will be marginally successful. They expect that the two successes will pay for the time given to, and risk exposures venture into, the other eight. In good times, the funds that do succeed may offer returns of 300 to 1000 per cent to investors.

II

 VC in the United States of America

The United States of America (USA) maintains the oldest and most dominant position worldwide in venture capital. The lead of the USA in venture capital, combined with the widespread use of technology, has enabled an otherwise mature, wealthy economy to improve its income and standard of living over most other advanced economies. The US has a unique mix of policy, entrepreneurship, and skilled research that is unmatched worldwide. USA has been the birthplace of venture capital industry and therefore the historical background has been reviewed only for the USA . VC capital has been provided for financing some of the most dynamic, innovative firm clusters in the US . Prominent US companies that received venture financing during their growth phases are globally the most famous ones; they include: Microsoft, Federal Express, AOL, Apple, Office Depot, Intel, Home Depot, Cisco, Compaq, Genentech, Amgen, 3Com, Amgen, AMD, Seagate, Oracle, Sun Microsystems and Starbucks (Table 1). More recent beneficiaries of venture funding include: e-Bay, JetBlue, Seagate, Salesforce and Google.

Evolution of VC in the USA

Prior to World War II, universally the source of capital for entrepreneurs was the government, government-sponsored institutions or informal investors that usually had some prior relationship to the entrepreneur. In general, throughout history private and government-sponsored banks, have been unwilling to lend money to a newly established firm, because of the high risk and lack of collateral.  During the 1950s there existed a market in US for arranging VC financing which was fairly informal, relying primarily on the resources of wealthy individuals and families.

            After World War II, in US a set of intermediaries, the venture capitalists, emerged whose sole activity was investing in start-up firms having the potential of rapid growth with a concurrent capital appreciation. General Georges Doroit is considered to be the father of VC industry in the US . In 1946 he founded American Research and Development Corporation (ARD), a publicly traded, closed-end investment company. ARD's best-known investment was the start-up financing it provided in 1958 for computer maker Digital Equipment (DE) Corporation. When DE went public in 1968 it provided ARD with 101 per cent annualised Return on Investment (ROI). ARD's US $70,000 investment in DE in 1959 had a market value of US $37 million in 1968. Likewise, the first venture-backed startup is generally considered to be Fairchild Semiconductor, funded in 1959 by Venrock Associates.

1. Emergence of Venture Capital as an Institution: Venture Capital being a very sensitive institutional form due to the high-risk nature of its investments it was prerequisite for the government to be careful to ensure that its policies do not adversely affect its venture capitalists.

Initially, in the US venture capital emerged through an organic trial-and-error process and soon after the government played a direct and indirect role to promote the development of VC industry. The US government played a direct role with the introduction of Small Business Investment Act of 1958 authorising the formation of small business investment corporations (SBICs) to provide financing and management assistance to small entrepreneurial businesses in the US . The goal of the SBIC program was, and still is, to stimulate the US economy in general, and small businesses in particular, by facilitating the flow of capital to pioneering small firms. This legislation created a vehicle for funding small firms of all types. The new act permitted individuals to form SBICs with private funds as paid-in capital. In addition, tax concessions and some other benefits, such as income and capital gains were provided.

The SBIC program experienced serious problems right from its inception. One problem was that as a government agency it was very bureaucratic having many rules and regulations that were changing frequently. Since 1965 several SBICs were found to be involved in misappropriation of funds and fraudulent practices. Despite corruption, SBICs was a success story, especially, in Silicon Valley , as a number of individuals used their SBICs to leverage their personal capital, and few of them were able to reimburse the program and raise institutional money to become formal VCs. The SBIC program accelerated their capital accumulation thus enabling the new venture capitalists professionalize their investment activity. Now well-known firms such as Sutter Hill Ventures, Institutional Venture Partners and Bank of America Ventures began as SBICs.

By allowing the pension funds to invest in prudent amount in venture capital firms the US government played an important indirect role for encouraging the VC industry. Besides the NASDAQ stock market, which has been the exit strategy of choice for venture capitalists, was strictly regulated and characterized by increasing transparency thus restraining investors’ fears of fraud and deception.

2. Promotion of university research: The most dynamic aspect of technology advancement in the USA and hence the source of indirect support for VC firms has been the willingness of the US government to invest heavily and continuously in university research. As a result, there was a continuous supply of expert technocrats, scientists, and trained personnel with innovative ideas; some of them formed firms that have been funded by VCs. US universities particularly, MIT, Stanford, Harvard and UC Berkeley, have played a salient role. In addition, judicious, well-planned government policies have indirectly helped in the formation of independent self-sustaining venture capital industry in the US .

3. Slow growth in the 1960s and the early 1970s:  During the 1960s and 1970s, venture capitalists focused their investment activity primarily on start-up and expanding firms. Almost all firms backed by VCs were exploiting breakthroughs in electronic, medical, IT or data processing technologies. As a result, venture capital came to be almost synonymous with technology finance. The historical record also indicates that government actions can also harm venture capital industry. For instance, in 1973 US Congress changed the pension fund regulations, in response to widespread corruption in pension funds. US Congress passed the Employment Retirement Income Security Act (ERISA) making pension fund managers criminally liable for losses incurred in high-risk investments. As a result, pension fund managers averted VCs nearly annihilating the entire VC industry. Later on this was only reversed after active lobbying by the newly- formed National Venture Capital Association (NVCA). This coincided with the venture capital firms suffering a temporary downturn in 1974, when the stock market crashed and investors were naturally wary of this new kind of investment fund. It was shortlived and during 1975-77 there was a steady rise of investments in VC firms and consequently, in the year 1978, the VC industry could raise around $750 million.

4. High’s and Lows of the 1980s: In 1980, legislation made it possible for pension funds to invest in alternative asset classes such as venture capital firms. 1983 turned out to be the boom year - the stock market witnessed stunning growth and there were over 100 initial public offerings (IPOs) for the first time in US history. That year was also the year that many of today's largest and most prominent firms were founded. During the mid-1980s, VC returns were very low, due to the excess of IPOs and the inexperience of many venture capital fund managers. VC firms retrenched, working hard to make their portfolio companies successful. The work paid off and returns began climbing up again.

Since the mid-1980s the development of the US venture capital industry has become a process of formalising the institutions, a process that was even manifested in the contracts between VCs and entrepreneurs. After the mid-1980s, the institution of VC had become a part of the US NIS with its own industry association, practices and routines. By the mid 1980s, the ideal-typical venture capital firms were based in Silicon Valley and invested largely in electronics with lesser sums devoted to biomedical technologies. Until the present, in addition to Silicon Valley, the two other major destinations have been Boston and New York City .

5. Stupendous growth in the 1990s: The 1990s have been by far the best years for the VC industry on account of favourable economic climate in the US coupled with the advent of the Internet boom. During this decade, the interest rates were low and the P/Es were very high compared to historical averages. In the US , from 1992 to 1996, about $10 billion per year of VC was invested, producing on an average 25-40 per cent annual rates of return. In the 1990s, the rate of Mergers and Acquisitions (M&A) activity has also increased significantly, creating more opportunities for small, venture-backed companies to exit at high prices. In the late 1990s the advent of internet as a new medium for both personal and business communications and commerce created a plethora of opportunities for VCs. As a result, the industry has witnessed extraordinary growth in the past few years, both in the number of firms, and in the amount of capital they have raised. The late 1990s was a boom time for the globally renowned VC firms of San Francisco , California . As of 1999, the U.S. venture capital firm Kleiner, Perkins, Caufield and Byers claimed that the portfolio firms that it had funded since its inception in 1973 had a total market capitalization of $657 billion, revenue of $93 billion, employed 252,000 persons, and had invested in excess of $2 billion. 

Economic Impact of Venture Capital in the USA

            Venture capital backing seems to be an efficient method for commercializing innovations. Though there has been only limited research on the macro-economic impacts, there is ample evidence that it has had a significant impact in the US economy. It certainly has been the key financier of the US "New Economy" firms, and become a vital resource in regions such as Silicon Valley and Boston ’s Route 128. The anecdotal evidence of the economic importance of venture capital is overwhelming. On the US stock exchanges a number of highly capitalized firms including Intel, Cisco, Federal Express, Google and eBay were originally funded by venture capitalists.

According to Barry Taylor, of Warburg Pincus LLC (a global venture capital and private equity firm with over $9 billion global investments in information technology, internet, healthcare, media, telecom etc) the key to Silicon Valley ’s success is its entrepreneurial culture, the acceptance of failure, and the availability of risk capital. This environment has attracted the best and the brightest from around the world, leading to very diverse management teams.

Measurement of the importance of venture capital in the economy is quite difficult, because in terms of capital investment it is only a minute portion of the total economy. As per the latest overview of the findings in the “Venture Impact 2004: Venture Capital Benefits to the U.S. Economy”, commissioned by the National Venture Capital Association (NVCA), the VC contribution to economic growth, employment generation and technological progress has scaled up steadily over the last five years. The most recent data indicates that VC funding continued to play a paramount role in nourishing the US economy by bringing concepts and business models to life.

Salient features of the report, “Venture Impact 2004:Venture Capital Benefits to the US Economy” are as follows:

1. The Venture Capital industry has grown to become a major force in the US economy. Companies that received venture financing during 1970-2003 accounted for 10.1 million jobs and $1.8 trillion in revenue in 2003. This corresponds to 9.4 per cent of total US private sector employment and 9.6 per cent of total company sales.

2. During 2000-2003, VC backed firms added some 600,000 new jobs in the US economy. VC supported firms such as Google, eBay and JetBlue have hired thousands of new employees over the last three years.

3. VC backed firms create jobs at a significantly faster rate than their non-ventured counterparts. During 2000-2003 VC backed firms increased their employment base by 6.5 percent, while overall total private sector employment dropped by 2.3 percent due to slowdown of the US economy, whereas VC backed firms were mildly impacted by the recession.

The data in Table 3 indicates that the venture capital job-creating engine is not limited to one segment of the economy. It permeates the entire US economy. During 2000-03 ventured companies in biotechnology posted an employment gain of 23 percent and healthcare products grew by 16 per cent.

4. Like employment, VC backed firms outperformed their national counterparts in every industry sector when measured by sales. During 2000-03, sales of the venture-backed firms grew by 11.6 per cent, compared to an overall 6.5 per cent growth nationally.

5. Mergers and acquisitions (M&A) are an important liquidity strategy for venture capitalists and the start-up firms they fund.  There has been a phenomenal growth in M&A activity.  Total venture backed M&A activity with disclosed values dropped from a high of 202 in 2000 to 122 in 2003, declining from $68 billion to $8 billion.

6. VC backed firms are the national leaders in research and development.  The mix of US research and development (R&D) is shifting toward smaller firms in the leading-edge biotechnology, medical research, and high-technology industries. Ventured firms spend over twice as much on R&D as non-ventured firms. In particular, small firms in the venture dominated information technology and medical-related sectors are major contributors to these trends.  The share of U.S. R&D by firms with fewer than 500 employees rose from 5.9 percent in 1984 to an estimated 20.7 percent in 2003. The increased penetration of small company research is most striking in the biotechnology sector.  The small company share of biotech research has expanded massively from some 3 percent in 1984 to nearly 40 percent in 2003, while the share of the large companies shrank from 31 percent in 1984 to 18 percent in 2003. 

7. E-commerce sales have been transformed in many ways over recent years in US. Ventured retail companies, including The Home Depot, Office Depot, eBay and Staples have offered a creative business model. Data also indicates that the impact of E-commerce has been widespread.  U.S. Department of Commerce statistics indicate that E-commerce has been growing rapidly in percentage terms, although it still is only a modest percentage of total retailing. Retail e-commerce sales in first quarter 2004 were $15.5 billion, up 28.1 percent from first quarter 2003. (Table 6)

 Another indicator of the significance of venture capital investment is its impact on the innovation process. Kortum and Lerner (2000) using a sample of firms and patent filings found that venture funding accounted for 8 per cent of US industrial innovations in the decade ended in 1992 and estimated that this might have increased to as much as 14 percent by 1998. However, their result confirmed the importance of VC in encouraging R&D investment, and as a complement to other R&D sources.

III

Global Spread of VC Culture

In the last decade, one of the most admired institutions among industrialists and economic policymakers around the world has been the US venture capital industry. A recent OECD (2000) report has identified VC as a crucial component for the success of entrepreneurial high-technology firms and recommended that all countries consider strategies for encouraging the availability of venture capital.

At the beginning of the 21st century, the importance of venture capital for the funding of new high-growth potential firms is universally recognised. VC is expanding its boundaries in many ways as it enters a new investment cycle. Innovation is arising in many different places and in many different forms – and VC is following it to new frontiers. In the last two decades, VC investing has diffused internationally – there are now 30 national venture capital associations. The experience with VC finance in developing countries is more limited than in industrial countries. Nevertheless, there are probably more than 250 venture capital funds operating in Eastern Europe and Asia and as many as 400 operating in developing countries worldwide. Detailed reports on VC investments in developing countries are not available due to the relatively short history of VC investments and lack of documentation of private financing. 

The VC investment patterns differ from country to country. US investment is significantly clustered in the IT sector, with a substantial sum also being invested in medical and biotechnology fields.  In effect, US investments are clustered in sectors with extremely high valued-added and where manufacturing is not a significant issue. A majority of the Taiwan ’s VC investment is concentrated in electronics related firms, whereas in Korea and Japan bulk of the VC investments is in the manufacturing sectors. Singapore has an even distribution across categories and has a much greater percentage is invested in medical area than any other Asian nation and Hong Kong ’s VC investments are concentrated in communications. Israel ’s VC investments are in diversified areas, namely, medicine, computer hardware, food processing, biotechnology etc.

Venture capital investment marked the beginning of a new cycle in 2004. For the first year since 2000, many global areas saw an increase in the amount invested in venture capital. Across the US , Europe, and Israel , an aggregate $25.7 billion was invested in 3,222 deals, according to Ernst & Young - VentureOne research. In Europe , venture capital investment, which declined 30 per cent from 2002 to 2003, stabilised in 2004 at $4.5 billion.

In the year 2004 US continued to be the top destination for VC investments worth $20.4 billion in 2067 deals (Table 7). UK received the second largest amount of venture capital investment in 2004 with $1.5 billion invested in 286 deals.

With China ’s economy growing at an average rate of 8 percent a year, it is no surprise that an increasing amount of VC is being invested in the country. The VC investment in China was around $1.3 billion in 2004, up from $1 billion in 2003. This level of VC investment makes China the third largest VC market. While in Israel investment increased 27 percent to $700 million. The overall investments in Israeli companies based both in and outside of Israel increased 25 percent to $1.2 billion, as Israeli venture capital model is largely based on exporting companies abroad.

TSJ Media reports that $600 million was invested in 47 Indian start-up, early-stage, expansion stage and later-stage companies by private equity and VCs. Although investments in BPO companies made up the majority deals in 2004, with ten companies raising $148 million, this represented a sharp drop-off from 2003 when $182 million was invested in 24 BPO companies. Data storage firm Moser Baer received the largest private equity round, a $149 million investment from Warburg Pincus LLC. In addition, investments were made in cement, pharmaceuticals, construction and healthcare sectors.

IV

Venture Capital in India : Still in a Nascent Stage

In 1973 a committee on Development of Small and Medium Enterprises highlighted the need to foster VC as a source of funding new entrepreneurs and technology. Thereafter some public sector funds were set up but the activity of VC did not gather momentum as the thrust was on high-technology projects funded on a purely financial rather than a holistic basis.

Later, in 1988 a study was undertaken by the World Bank to examine the possibility of developing VC in the private sector, based on which the Government of India (GoI) took a policy initiative and announced guidelines for Venture Capital Funds (VCFs) in India. However, these guidelines restricted setting up of VCFs by the banks or the financial institutions only. Thereafter, GoI issued guidelines in September 1995 for overseas investment in VC in India . Further, as a part of its mandate to regulate and to develop the Indian capital markets, the Securities and Exchange Board of India (SEBI) framed the SEBI (Venture Capital Funds) Regulations, 1996. These guidelines were further amended in April 2000 with the objective of fuelling the growth of VC activities in India .

In the absence of an organised Venture Capital industry till almost 1998, individual investors and development financial institutions have played the role of venture capitalists in India . Entrepreneurs have largely depended upon private placements, public offerings and lending by the financial institutions. Given the proper environment and policy support, there is undoubtedly tremendous potential for VC activity in India . The Finance Minister of India , in his 1999 budget speech, announced that, "for boosting high-tech sectors and supporting first generation entrepreneurs, there is an acute need for higher investment in venture capital activities." The SEBI committee on VC was set up in July 1999 to identify the impediments and suggest suitable measures to facilitate the growth of venture capital activity in India . Also keeping in view the need for a global perspective it was decided to associate Indian entrepreneurs from Silicon Valley in the committee.

Post-Liberalisation

Post-liberalisation, the Indian investment scene has witnessed significant changes in the past few years. Gone are the days when young entrepreneurs packed with ideas ran from pillar to post to get that evasive bank loan to start their venture. With a number of banks today focusing more on retail banking, it is the VC firms and private equity firms that are making entrepreneurs realise their dreams. Earlier, when an entrepreneur wanted to raise a sum even as low as Rs 5-10 crore, to expand operations, he had to go for an initial public offering (IPO) as there were very few options to raise capital. Equity capital was available only through an IPO. Today, access to capital has increased significantly. Funds are easily available to any dynamic entrepreneur.

VC Investments in India

The Securities and Exchange Board of India (Sebi) has played a phenomenal role in facilitating the flow of venture capital into India . In the mid-1990s, VC funding in India hovered around $20 million. From 1990-1995 accurate data on VC investments in India was not available due to lack of proper reporting system. As per the data released by The Indian Venture Capital Association (IVCA), the apex association of VC funds in the country, VC investments has doubled to $ 500 million in 1999 against $ 250 million in 1998. In the year 2000, India received a record-high of $1160 million on account of huge investments in dot-com firms. In 2004, the VC investments have increased by 16 per cent to $ 900 million against $ 774 million in 2003.

In order to minimize the risk VC funds in India prefer investing in expansion stage rather than seed capital or early stage due to high risks involved in the initial stages and VC’s inability to spot potential innovators in early stages . The investment break-up indicated in Table 9 reveals that bulk of the VC investments in India - around 59 per cent - was in the expansion stage of the firms.  Seed capital and early capital stage accounts for 13.7 per cent out of the total VC investments in India .

            One of the biggest investments by a VC firm in India in the recent past would be that of Warburg Pincus, which invested $300 million in Bharti Televentures, before the company went public in 2002. The more recent investment has been the picking up of 14.2 per cent stake in Matrix Labs by Temasek Holdings and Newbridge Capital for Rs 337 crore, last year. And the biggest exit is obviously Citigroup Ventures’ sell off of its 41 per cent stake in i-flex solutions to Oracle Corp for $593 million.

VC Investments during April – June 2005 (1^st Quarter)

Latest data available for the first quarter of 2005-06 suggest that the $32.6 million investment raised by Mumbai-based ABG Shipyard from Merilon India Fund (a JV between Standard Chartered Private Equity and Temasek Capital) and IL&FS Investment Managers was the single largest investment reported during the quarter. ABG will deploy part of the new funds in expanding its shipbuilding facilities. The $30.2 million invested by US-based Amaranth Advisors in Indiabulls Finance, a consumer lending subsidiary of publicly listed online stockbroking firm Indiabulls Financial Services, in return for a 42.5 per cent stake, was the second largest deal. Infrastructure Development Finance Company’s (IDFC) $29.1 million investment in private sector shipping port Gujarat Pipavav Port in return for a 15 per cent was the third largest deal reported during the period.

             An interesting development of the period has been that manufacturing, has topped in the first quarter in terms of both the number of investment as well as the amount of funding raised, with 9 manufacturing companies raising about $83.45 million. The manufacturing industry was led by Rico Auto Industries – a Gurgaon-based publicly listed manufacturer of automobile components, which raised about $24 million from Morgan Stanley ($15.6 million), New Vernon Bharat ($5.4 million) and Bessemer Venture Partners ($3 million). Rico was followed by Mumbai-based listed polyester chips and yarn manufacturer JBF Industries, which raised about $16.5 million investment from CVC International and IL&FS VC.

Venture Capital and private equity firms exited their investments in 9 Indian companies including via IPOs in this quarter.

            The IT and IT-enabled services (ITES) industry followed second with 8 investments worth $52 million. Hyderabad-based and Silicon Valley-registered HelloSoft, a supplier of signal processing technology and software-defined radio solutions for telecommunications markets, raised the maximum funding of $16 million in this sector.

Indian VCs are investing in diversified sectors, but the bulk of the funds invested in the ITES and telecommunications sector. Indian VC investments are in the following major sectors:

India ’s VC Cities

 In the 1990s VC funding activity was dominant in a few cities, namely, Mumbai, Bangalore and Delhi . In the last few 4-5 years, Chennai, Hyderabad and Pune have emerged to be the new cities to receive VC investments. (Table 10)

IV

The Issues

China attracts the double of VC investment compared to India , despite India ’s better scores over China in various aspects. Experts point out to the wide participation of foreign institutional investors in Indian firms and the good English-speaking population as the advantages India has over China . In addition, a strong legal framework including the IT Act, Copyright laws, VC norms and the electronic trading facility through BSE and NSE, will stand India in good stead.

The venture capital industry in India is still at a nascent stage. With a view to promoting innovation, enterprise and conversion of scientific technology and knowledge-based ideas into commercial production, it is very important to promote venture capital activity in India . India ’s recent success story in the area of information technology (IT) has proved that there is tremendous potential for growth of knowledge-based industries. This potential is not only confined to IT but is equally relevant in several areas such as bio-technology, pharmaceuticals and drugs, agriculture, food processing, telecommunications, services, etc. Given the inherent strength by way of its skilled and cost competitive manpower, technology, research and entrepreneurship, with proper environment and policy support, India can achieve rapid economic growth and competitive global strength in a sustainable manner. Indian VCs have yet to be established as a sustainable asset class among institutional investors. Moreover, a limited amount of risk for the seed capital impacts entrepreneurial activity. Exit challenges exist mainly due to shallow capital markets and dull M&A environment for small companies. Most importantly, India is yet to create a brand name for IP-led companies, like Israel has successfully done.

* This note is prepared by Bipin K. Deokar.

Highlights of  Current Economic Scene

AGRICULTURE     

Rabi sowings of some of the major crops have covered almost all the states. A total 5.1 million hectares have been brought under wheat cultivation with Haryana and Rajasthan reporting increase in acreage, while sowing is lagging in Punjab . Oilseed sowing, with total area under cultivation at 7.59 million hectares, is up 3.9 per cent from a year earlier driven by increase in sowings of Mustard and rapeseed. Groundnut acreage is however down, by 20 per cent, at 450000 hectares with sowings reportedly lagging in Andhra Pradesh and Tamil Nadu. Sowing of Coarse cereal has registered a marginal decline over the previous year driven by the fall in the acreages of jowar, bajra and maize. On the other hand, sowing of rabi rice is up by 7.5 per cent higher at 142,000 hectares, from a year earlier with Tamil Nadu reporting higher acreages at 50000 hectares.

FCI is exploring the possibility of futures trading in surplus grain for better price realization. The FCI is also consulting National Commodity and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange of India (MCX), regarding their participation in futures trading. This possibility has been checked out as one of the ways to trade food grain stocks that are surplus after meeting the public distribution and buffer stock requirements on the commodity exchanges without compromising on the objectives like assurance of food grain security and market stability.

The Coffee Board has recommended a sharp cut in the customs duty on roasting and brewing equipment. The reduction in the current import duty, which is 34 per cent, to about 5 per cent is suggested for a period of 5 years to boost the domestic consumption.

Despite late arrivals in most retail markets, especially in North India , onion prices continue to remain high. Traders attribute this to speculation following the apprehensions that the next Maharashtra crop will take a month to reach the market. The high prices, however, prevails despite supply exceeding demand. Potato prices are also escalating as the local supply has come to a halt and there is no fresh stock coming to the APMC. In Maharashtra , farmers are holding back their produce for some days before selling it to stockist, who in turn hold it for a few more days, before offloading it in the open market. This is adding to the supply lag.

INDUSTRY

Automobiles

 A special economic zone (SEZ) in Jharkhand dedicated to the manufacture of world-class auto components is expected to be functional within a year. The first phase  is to be limited at 90 acres with plans of expansion to around 1700 acres, for the next phase. It is expected to bring in a minimum FDI of Rs 5000 crore and generate employment for around 15000 persons.

 Automatic transmission (AT) cars are not doing well in India as compared to developed countries despite efforts from the Indian carmakers. AT cars, which enable drivers to drive the car without worrying about using the clutch and shifting gears, constitute only 1-2 per cent of the total car sales in the country, while for Europe it is 60 per cent and for US it is 90 per cent.

 Pharmaceuticals

 The government is planning to fully exempt 42 cancer and AIDS drugs, many of which are imported, from all central duties and also extend a 50 per cent subsidy to all cancer drugs if sold through retail outlets in hospitals. Further, prices of these drugs would be fixed by manufacturers or importers after negotiations with the government to ensure that consumers benefit fully from the tax waiver. Currently, all cancer and AIDS drugs fall outside the price control mechanism, since none of them meet the twin criteria of mass consumption and incidence of competition. Presently, the total turnover of cancer drugs in the domestic market is Rs 300 crore but the actual market potential is estimated at Rs 3500-4000 crore.

 Mining

 The Jharkhand and Chhattisgarh governments want diamond mining companies to add value to their operations by undertaking cutting and polishing of diamonds within the state; on the same lines as their policy of granting iron ore mining rights only to those companies which add value in the state by producing steel. The problem though is that leading diamond-mining companies like De Beers of South Africa is unable to give such an undertaking since they are only diamond suppliers and not into cutting and polishing activities, which in India are currently confined to Surat in Gujarat and a few locations around Mumbai.

 INFRASTRUCTURE

Overall

 A group of ministers will soon consider a proposal to utilise surplus cash and reserves of public sector companies (PSUs) for diversification into infrastructure; surplus cash and reserves of the top 50 PSUs are estimated at nearly Rs 350,000 crore.

Power

 The final amendments to the Electricity Act of 2003 seek to bury the original plan of eliminating cross subsidies replacing it with a clause for reduction of cross subsidies. Further, it has been made mandatory for the centre to share the burden of providing electricity to rural India . Also, though the police would be able to investigate cognisable offences like theft of electricity, interference with meters, etc, yet no prosecution could be instituted except at the instance of the appropriate government/commission.

The committee of secretaries has cleared the new tariff policy with two significant changes. One, it has allowed a five-year transition period to state owned companies for developing power projects on the basis of competitive bidding, while all private sector projects would be developed on the basis of competitive bidding. Secondly, it has announced that the maximum opening cross-subsidy surcharge, together with all other surcharges payable for availing open access, should not exceed the difference between current tariff of relevant consumer category and current cost of supply inclusive of all costs and charges; and it should be brought down to 20 per cent of its opening level by 2010-11.

Petroleum, Petroleum Products and Natural Gas

The cabinet committee has given its approval for oil companies ONGC, IOC and GAIL to sell their cross-holdings through public offers valued at around Rs 25000 crore. IOC holds a 9.6 per cent stake in ONGC, which, in turn, has a 9.1 per cent stake in IOC; GAIL has a 2.4 per cent stake in ONGC, while ONGC and IOC own 4.8 per cent each in GAIL. The companies are free to decide on the manner and timing of off-loading the cross-holdings in consultation with the petroleum and finance ministries the proceeds from sale of shares can be utilised in funding capital expenditure approved under the tenth plan.

Coal

The Energy Co-ordination Committee (ECC) has directed Coal India Limited (CIL) to explore possibilities of forming joint ventures with leading Indian private sector companies like Tata Steel, Jindal Steel, Ispat Industries and Essar Steel for acquiring coal mines abroad. As per recommendation made by the ECC, a dedicated task force has been set up in CIL in the form of Coal Videsh Department (CVD) to plan investments in coal mining acquisitions abroad in Australia , Indonesia , Mozambique and Zimbabwe . CIL estimates the overseas arm to contribute 10 million tonne of coal by 2010 and 50 million tonne by 2020.

 Steel

 The Orissa government has signed 43 MoUs lining up 58.04 million tonne of steel projects with a total projected investment of Rs 133656 crore. It is currently contemplating whether any more MoUs should be signed in the steel sector or not, since it is facing problems like availability of land and linkage of iron ore mines, coal mines and water supply for the new projects.

 Railways

 The Indian railways has projected a nearly 20 per cent increase in its annual plan outlay – Rs 14192 crore during 2006-07 as against Rs 11827 crore during the current year. It also wants to make a 15-year plan, instead of the usual 5-year plan to ensure that targets are set with a long term in perspective.

 Indian Railways is all set to put an end to public sector monopoly for purchasing electricity and making plans to purchase power from independent power producers. Presently, the railways meets its entire demand for power, estimated at over 10000 million units, from state electricity boards and NTPC.

 The new Electricity Act of 2003 has allowed open access to entities like the railways for whom it was previously mandatory to approach the SEBs to satisfy its demand for power.  The move is expected to help the railways purchase power at lower prices than the current per unit cost estimated at Rs 4.38 as well as help reduce its transmission costs.

 Roads

 The NHAI has re-awarded three contracts pertaining to the NSEW corridor, which had been terminated earlier this year. The three contracts are among six bids that NHAI had awarded during October 2005. However, the downside is that all the six contracts are EPC (engineering and procurement and construction) contracts implying that though NHAI has found takers or implementing the works, it would have to fund the projects from its own pockets.

 Aviation

 Air turbine fuel (ATF) prices in India have gone up by around 75 per cent in absolute terms since 2003. The surging global crude oil prices has caused fuel costs to go up from 15 per cent to 25 per cent for major carriers; the impact has been greater for low-cost airlines, since fuel costs are as much as 35-40 per cent of revenues.

 The centre wants a new airport coming up in Devanhalli near Bangalore to be completed by 2010, five years ahead of schedule, in view of a much faster rise in traffic than had been anticipated. As per initial estimates the new airport is to have a minimum handling capacity of 20 aircrafts, handle 5 million passengers by end of first phase in 2010 and 40 million by 2015.

  India is embarking on a massive drive to upgrade existing airports and build new ones in 41 cities, including six key cities at cost of $ 10 billion over the next five years.

 The government has decided to allow international carriers to operate flights with higher capacity to India during the first two months of the peak season, beginning mid-November. However, during this period the carriers will not be allowed to increase the number of services they operate to India . In the second phase, beginning in January, the foreign carriers may be allowed to operate more flights to their existing centres of operation, though operations in new centres may not be allowed.

 Shipping

 Security concerns due to mafia operations, government negligence and poor infrastructure at Mumbai ports are forcing importers to shift base to adjoining states such as Gujarat . It is estimated that the state government has suffered almost up to 20-25 per cent of revenue loss because of the situation.

INFLATION

The annual point-to-point inflation rate based on wholesale price index has gone up to 4.20 per cent during the week ended November 12, 2005 from 4.14 per cent registered during the previous week. The inflation rate was at 7.68 per cent in the corresponding week last year.

The WPI in the week under review has risen marginally by 0.1 per cent to 198.6 from the previous week’s level of 198.5 (Base: 1993-94=100). The index of primary articles’ group has risen a tad by 0.1 per cent to 199.9 from the previous week’s level of 199.7, due to an increase in the price indices of non-food articles by 0.2 per cent to 183 from 182.6 in the previous week and minerals by 2.2 per cent to 355.9 from 348.2 in the previous week. The higher prices of non-food articles are attributed to the increase in the prices of condiments and spices, jowar, fruits and vegetables, ragi and rice. Similarly, the higher prices of minerals are attributed to a rise in the prices of manganese ore and iron ore. The index of ‘fuel, power, light and lubricants’ group has declined marginally to 312.4 from the previous week’s level of 312.5. The index of manufactured products’ group constituting the maximum of 63.7 per cent of total weight, has remained unchanged at the previous week’s level of 172.7.

The latest final index of WPI for the week ended September 17, 2005 has been revised upwards; as a result both, the absolute index and the implied inflation rate moved up to 197.3 and 4.17 per cent instead of the provisional levels of 196.5 and 3.75 per cent, respectively.

Overall, the rate of inflation has remained reasonably contained in the range of 4 to 4.5 per cent in the month of November. The Reserve Bank of India has assured in it’s Mid-Term Review 2005-06, that it would keep a close watch on inflationary movements in the near future and if necessary, would use fiscal and monetary measures in order to contain the same. Moreover, the Finance Minister has also assured over price stability by emphasising on fiscal measures, if necessary. He added that the current rate of inflation, which is below 5 per cent is not a cause of concern.   

BANKING

The RBI has cancelled the certificate of registration issued to Hyderabad-based Karvy Consultants Ltd., Punjab-based D S Brar Finance Company Ltd. and Chandigarh-based Chandimandir Motor Finance Pvt. Ltd., for carrying on the business of a non-banking financial institution.

 Dena Bank is the first bank to introduce no frills banking by launching a new deposit account, which can be opened with an initial minimum balance of Rs.10.

 The RBI has announced that the interest rates on fresh repatriable non-resident (external) rupee (NRE) deposits for one to three years effective from November 17, 2005 should not exceed 75 basis points (as against 50 basis points effective from November 1, 2004) above the London Inter bank offer rate (Libor) / swap rates for US dollar of corresponding maturity. The maturity period of repatriable NRE deposits would continue to be one to three years and the interest rate as determined above 3 year deposits would also be applicable in case the maturity period exceeds three years. The changes in interest rates will also apply to repatriable NRE deposits renewed after their present maturity period.

 NABARD for the first time in the country has decided to conduct a survey in three districts of Punjab to ascertain reasons behind prevailing indebtedness in the region. The survey would be conducted in Mansa, Sangrur and Ferozepur districts where farmers were reeling under heavy debts.

PUBLIC FINANCE

 The government is considering a two-tier excise structure for the automakers. Cars may get cheaper with the excise duty likely to be scaled down from 24 per cent to 16 per cent. Especially, small cars would get cheaper with an excise duty of 8 per cent. These duty changes are likely to form a part of an auto policy worked upon by the government, which may even reflect in the forthcoming budget. All passenger cars now attract excise at 24 per cent, sales tax at 12 per cent, road tax in the range of 4-11 per cent and Octroi. In addition to the customs duty on components, the tax component is over half of what a customer pays for a car.

The left parties have thrown some positive signals by agreeing to consider its proposal to divest a small percentage of equity in non-navratna profit-making PSUs on a case-to-case basis. The finance minister said some PSUs have been identified.

The finance ministry has dropped the move to expand the scope of taxing advertising services by treating the amount paid by the ad agency to the print media as a taxable input service. The draft circular was issued by the Central Board of Excise and Customs (CBEC) on October 11, which virtually proposed to put advertising in print media as a taxable input service.

In its pre-budget recommendation to the finance ministry and the information and technology ministry, Consumer Electronics and TV Manufacturer’s Association (Cetma) has recommended the abolition of central sales tax (CST) on electronic goods and reductions of custom duty on finished products and components to boost manufacturing in the country. Cetma’s contention is that CST has resulted in negative protection  to the domestic manufacturers, especially  after the free trade agreement with Thailand .

To make Indian textile globally competitive, industry chamber Ficci has sought a reduction in excise and customs duties in the forthcoming Budget. In its pre-budget memorandum, the chamber said excise duty on input and capital goods should be reduced to 8.16 per cent from the current 16.32 per cent. Ficci said the value addition in yarns are usually in the range of  35-40 per cent over input costs, which results in unutilisation of Cenvat credit  to the extent of Rs 4-6 per kg. This adds to the production cost and had made spinning mills unviable.

FINANCIAL  MARKET

Capital Markets

Primary Market

Repro, an integrated end-to-end printing service provider, is entering the market with an IPO of 26.20 lakh shares of Rs 10 each within a price band of Rs 146-165 per share. The issue is to open on November 28. 

Kernex Microsystem Ltd is tapping the market between November 28 and December 3 through issue of 44 lakh shares of Rs 10 each through book-building process in a price band of Rs 225-250 per share.

ICICI bank’s public offer is open for subscription between December 1 and 6 to for an aggregate amount of Rs 5750 crore (including green shoe option of Rs 750 crore). The issue is through 100 per cent book building process for Rs 10 per share in a price band of Rs 505 to Rs 545 per share.

Fortune Infotech Ltd is issuing 13.51 lakh shares of Rs 10 each with a floor price of Rs 32.50 per share  between November 28 and December 2.

Secondary Market

Sustained buying from the FIIs and the mutual funds took the Sensex to touch its new peak. The week started on a weak note but later bounced back due to heavy buying in scrips from sectors like auto, IT, consumer durables, FMCG and power & automation. The rally has been stronger in the sensex stocks as compared to the midcap and the smallcap scrips. There is speculation that Japanese funds are aggressively launching the India dedicated funds. Also, easing of international crude oil prices supported the buoyant sentiments.

Among the sectoral indices of BSE, the highest gains have been recorded by capital goods index followed by automobiles and consumer durables. While BSE metals index suffered the higest losses. Over the week, BSE sensex gained 202 points while BSE small cap and mid-cap gained 112 and 61 points , respectively.

FIIs have been net buyers of equities between November 1 and 26 to the extent of Rs 3587 crore with purchases of Rs 19801 crore and sales of Rs 16214 crore. Even mutual funds have been net buyers of equities to the extent of Rs 408 crore with purchases of Rs 5125 crore and sales of Rs 4717 crore.

The surge in stock indices witnessed during the week in BSE sensex is spread across various exchanges, for instance, Nasdaq and S&P 500 have touched 59 month and 53 month peaks, respectively. Similarly, FTSE and DAX touched 51 month and 41 month highs, respectively; likewise, Asian exchanges such as Kospi and Nikkie have touched peaks.

Derivatives                                   

Given the rollover of contracts to December expiry, the trading volumes on the F&O segment of NSE increased. The daily average turnover during the week ranged between Rs 17646 crore and Rs 30363 crore.

After a while, the nifty December futures are prevailing at premium to the nifty index. As per its past behavior, the market goes into the correction mode when nifty futures are at a premium.

Between November 1 and 24, FIIs have been net buyers of futures as well as options to the extent of Rs 1062 crore and Rs 73 crore, respectively. 

Government Securities Market

Primary Market

The RBI has auctioned 8.35 per cent 2022 for a notified amount of Rs 5,000 crore at a cut-off yield of 7.43 per cent (price of Rs 108.65).

The RBI has fixed the rate of interest on the floating rate bond (FRB ) 2006 at 5.71 per cent for the period between November 22, 2005 and May 21, 2005.

The yields set on 91-day treasury bills auctioned on November 23 have eased from 5.82 per cent in the previous week to 5.74 per cent.

Secondary Market

During the week, liquidity conditions improved as indicated by the increase in average amount tendered under RBI’s LAF to Rs 5,700 crore from Rs 500 crore tendered in the previous week.  Unlike in the previous week, the LAF repo did not receive any bids again reflecting the growing comfort level on the liquidity front. In view of the pressure on liquidity, the RBI cancelled the auction of treasury bills under MSS. Further, appreciating rupee, deferred EPF meeting and comfortable crude oil prices added to the comfort of the market. the major factor affecting the market sentiments was the statements of some FOMC members clearly indicating the possibility of a pause in the interest rate hikes in near term. Also, the yield set at the central loan floatation being lower than the market expectation, the market sentiments turned buoyant. 

The RBI will introduce a second Liquidity Adjustment Facility (SLAF) with effect from November 28. SLAF will be conducted on all working days except Saturdays and these bids will be received between 3.00 pm and 3.45 pm. 

The weighted average YTM on 8.07 per cent 2017 eased from 7.25 per cent on November 18 to 7.18 per cent on November 25.

Bond Market

During the week under review, there were three issues : State Bank of Bikaner and Jaipur, HDFC and IDBI mobilising an aggregate amount of Rs. 1,300 crores.

Foreign Exchange Market

The rupee dollar exchange rate began the week at Rs 45.78 but fell to Rs 45.85 on November 22, which appreciated to Rs 45.72 on November 24 as FII inflows increased, but edged lower and reverted back again to Rs 45.78 on November 25 as the unit failed to sustain its appreciating trend.

The six-month forward premia rose to 0.63 per cent on November 25 from 0.53 per cent on November 18.

Commodities Futures derivatives

Since November 17, 2005, NCDEX is displaying on its website a Road Freight Index for India . The index encompasses 50 high-density routes (which are subject to change) and is structured on the basis of the weekly movement in freight rates. A change in the freight rate in any of these 50 routes would revise the index upwards or downwards. The  freight rate data is obtained from the Transport Corporation of India Limited. The index represents a simple average of the freight rates across these 50 routes, for a distance of 1000 kilometers. Thus, the index captures the movement of freight rates for a representative distance of 1000 kilometers, and dissociates the rate from the specific locations. The purpose of the Road Freight Index (FREIGHTEX)  is to help in the discovery of freight rates and thereby provide a robust  mechanism to both shippers/users (companies which desire to move goods) and transporters (truckers) to manage their price risk.

FREIGHTEX has declined from 1420.70 on November 7 to 1397.40 on November 28.

CREDIT  RATINGS

Icra has retained the ‘LAAA’ rating assigned to the Rs 3 Billion NCD programme of Reliance Energy Limited (REL). The ratings continue to factor stable cash flows from its licensee business accruing from cost plus tariff setting mechanism, its strong financial position and also its track record of efficient operations. The rating also factors the improving regulatory clarity with MERC having framed the tariff guidelines for the utilities in the state and also improved financial flexibility resulting from proposed infusion of equity capital by the promoter group and other institutional investors.

Icra has retained the ‘LAA+’ rating assigned to the Rs.180 million non-convertible debenture programme of Mahanagar Gas Limited (MGL). The rating continues to reflect the company’s monopoly position in the Greater Mumbai gas distribution license area, its diversified product portfolio, strong ownership pattern and favourable financial profile. The rating also takes into account the likely pressure on MGL’s future profitability on account of deregulation in gas pricing with future gas supplies being sourced at market linked prices.

Icra has assigned an ‘A3 +’ rating to the Rs 100 million commercial paper programme of Gemini Steel Tubes Limited (GSTL). The rating factors in GSTL’s concentration risk in sales to TVS group, its strained liquidity on account of capex and scheduled debt repayment, high gearing and its relatively smaller size of operations compared with other integrated and established players in the precision tubes (PT) industry.

Icra has upgraded the rating assigned to the fixed deposit program of Ansal Properties and Infrastructure limited from ‘MB’ to ‘ MA- ‘. The rating upgrade reflects the improvement in APIL’s liquidity and debt servicing ability following the buoyancy in the real estate market and which has enabled APIL to liquidate its inventory as well as recover substantial amounts from its outstanding receivables.

Care has assigned ‘AAA’ rating to the proposed Tier II subordinate bond issue of Rs. 3,300 crore of State Bank of India (SBI). The rating factors in SBI’s long standing track record of operation, its dominance in the banking system with its large asset size and extensive branch network, majority ownership by Reserve Bank of India, access to stable low cost resource base, improvements in asset quality, adequate capitalisation level and overall good profitability parameters.

Care reaffirms the ‘A-‘ rating assigned to the subordinate Tier II bond issue of Bank of Rajasthan (BoR) of Rs. 90.72 crore. The rating factors in the long track record of operations of the bank, low cost deposit base, improvement in asset quality of the bank and satisfactory capitalisation levels.

Care has assigned a ‘PR1 +’ rating to the ongoing short-term debt (including commercial paper, MIBOR –linked debentures and MIBOR –linked short term loan) programme of Usha Martin Ltd. (UML), for an amount up to Rs.150 crore (increased from Rs.100 crore) for a maturity period up to six months. The rating draws strength from the long experience and track record of the promoters, UML’s strong position in the wire and wire rope categories, backward integration undertaken by the company, GDR issue made by the company, strong overseas marketing set up with increasing presence in the export market, improvement in profitability and favourable outlook for the steel industry.

CORPORATE SECTOR

Tata Chemicals has entered into an agreement to acquire majority shares in UK based Brunner Mond Group Limited, one of the world’s leading manufacturers and suppliers of soda ash, with manufacturing sites in UK, Netherlands and Kenya.

Jindal Steel and Power has entered into a contract with Sasol-Lurgi Technology Company of South Africa and Lurgi AG of Germany for a coal gasification factory.

Himalaya International Limited, a pioneer in mushroom and vegetable exports, has ventured into producing Mozzarella cheese by setting up a plant in Himachal Pradesh in technical collaboration with an American firm, Artiginale Italiano Inc, at an investment of $ 2 million.

Japanese company Mitsui has signed a pact with Ruchi group for a joint venture steel project to manufacturer cold rolled steel and galvanised products. With the commissioning of this project the Ruchi group would add capacity of about half a million tonne to its existing steel processing capacity. This project would become operational by 2007.

Sun Pharmaceuticals, Alkem Laboratories and Ochao Laboratories have signed a contract with the Geneva based horphag Research to source a high value nutraceutical ingredient, Pycnogenol.

The Bharat Heavy Electrical Limited has commissioned its first 150-mega watt gas turbine in Libya in the third week of November 2005.

The Ahmedabad based Zydus Cadila has received the US FDA approval to market the anti-histamine drug Promethazine Tablets, in three strengths (12.5 mg, 25 mg and 50 mg).

The government of India has approved Vodafone group Plc’s proposal to acquire 49 per cent shares in Bharti Enterprises Limited.

Nicholas Piramal India Limited (NPIL) has signed a 10-year supply agreement with a global hospital products company. Under the agreement NPIL will supply a range of pharmaceuticals to the hospital products company. In October 2005, NPIL has also signed a long-term deal with AstraZeneca to develop processes for manufacture of intermediates and bulk drug.

The Piramal group has acquired 52 per cent shares in Dawn Mills. Dawn mill, located at Lower Parel in Mumbai, manufactures readymade garments, fabrics, hosiery and yarn.

Employees at MICO's Nashik plant have been on an indefinite strike since November 14, 2005. The company might lose almost 50 per cent of production due to the strike.

KPIT Cummins has acquired a majority shares in Pivolis, a French company that provides offshore consulting services and also KPIT Cummins has acquired SolvCentral.com Inc, a US based company, which provides business intelligence solutions.

LABOUR

According to the 60^th round survey conducted by National Sample Survey Organisation (NSSO), the unemployment rate in urban areas was more than double the rate in rural areas during January-June 2004. While the unemployment rate was 2.3 per cent for rural areas, it was 5.3 per cent in the urban areas. The sectoral data in the report also pointed out that 59 per cent male workers and 53 per cent female workers in urban areas were employed in the tertiary sector. Further, 35 per cent of the male workers and 31 per cent of female workers were engaged in the secondary sector. In contrast to this, the agriculture sector continued to be the main source of livelihood in rural areas with 66 per cent of the male population and 84 per cent of female population employed in this sector. The report also revealed interesting fact that the percentage of men employed in the total population in rural areas declined to 52.7 per cent as compared to 53 per cent in January-June 1998. The ratio improved to 22.8 per cent for females as compared to 21.7 per cent in January-June 1998. Interestingly, this ratio has gone up for both the groups in urban areas. It rose to 53.1 per cent as against 51.6 per cent in case of males and to 12.1 per cent from 0.99 per cent in case of females. The report has also thrown light on self-employment in rural and urban areas. According to the report, 57 per cent males and 62 per cent females were self-employed in rural areas and the corresponding proportions in urban areas were 44 per cent for males and 45 per cent for females. A data revealed in the survey exhibits a very diverse picture of employment scenario. 

The Central Board of Trustees (CBT) of the Employees’ Provident Fund Organisation (EPFO) has deferred a decision on fixing the interest rate on EPF accounts for the year 2005-06. According to the Labour minister, the decision was deferred due to the repeated demand from trade unions for fixing the interest rate at 9.5 per cent. According to the EPFO’s Finance and Investment Committee’s estimates, the interest liability at 9.5 per cent would be Rs. 7,699.52 as against an expected income of Rs. 6,523.15 crore during the year.

Of the Rs 79,764.48 crore invested by the EPFO at the end of the last financial year, nearly one third amounting to Rs 52,096 crore, is invested in Special Deposit Scheme (SDS), while another 14 per cent or Rs 11,175 crore is invested in instruments issued by public sector banks and financial institutions. The EPFO has invested another 11.52 per cent or Rs 9,189 crore in Central government securities.

Social sector

The Ministry of Chemicals and Fertilizers has prepared the proposal to levy one per cent health cess on all central direct taxes, including income tax, excise, customs, and corporate tax to fund healthcare activities and run a National Health Insurance Scheme for the poor. The proposal is in consensus with the current government’s common minimum programme (CMP), which states that the public spending on health would be raised to 2 to 3 per cent of GDP over the next five years. The combined expenditure on health in the year 2004-05 accounted for 1.3 per cent of GDP. Through the increased spending on health, the government would be able to raise Rs. 3000 crore and reach poorer sections of the society by increasing its funding on accessibility and affordability on critical drugs for the poor. In this regard, the government is consulting insurance companies to fund the National Health Insurance Scheme that is targeted at families living below the poverty line, which comprises about 26 per cent of the total population. The scheme is quite ambitious which aims at improving general health scenario of the neglected sections in the country.  

The government is considering with the aim of providing health insurance, survivor benefits and old-age pension to all workers particularly those in the unorganized sector. It has sought technical and actuarial advice from Life Insurance Corporation (LIC) on the kind of funding that would be required to provide the minimum benefits envisaged by the government. For this purpose, it has also decided upon appointing a high-level committee to address four basic issues, namely, the amount of provisions required, the source of funds, the infrastructure required and who would implement the scheme

EXTERNAL SECTOR

Textile exports to the US have grown at just 20.2 per cent during January-September 2005 in volume terms as compared to the corresponding period previous year. This is much slower than the growth rate of 24.1 per cent seen during January-June 2005, over the corresponding period in 2004.

India and Chile agreed on tariff cuts in the range of 10-50 per cent in the run up to the preferential trade pact. The reduction would benefit 266 Chilean products covering 98 per cent of its exports and 296 products accounting for 91 per cent of India ’s exports.

Madhya Pradesh has chalked out a plan to set up a special economic zone in Gwalior .

TELECOM

The Videsh Sanchar Nigam Ltd. and Microsoft Corp India have entered into a strategic partnership to launch a range of services. The first will be a web conferencing service offered on the Microsoft Office Live Meeting Software using VSNL broadband infrastructure.

*These statistics and the accompanying review are a product arising from the work undertaken under the joint ICICI research centre.org-EPWRF Data Base Project.

LIST OF WEEKLY THEMES

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