Weekly Newsletter

RCOM gets GSM license despite policy logjam
Even as a Government panel evaluates the enhanced subscriber base linked spectrum norms and the use of dual technology, the Department of Telecommunications (DoT) granted a pan India GSM license to Reliance Communications (RCOM). The DoT made necessary amendments to its Unified Access Service Licenses (UASL), enabling the Anil Dhirubhai Ambani Group (ADAG) company to offer GSM services in addition to its existing CDMA services. RCOM said it will, in due course, offer nation-wide GSM services in addition to its existing CDMA services. RCOM has already paid the requisite license fee of Rs16.51bn. The company had received Letters of Intent (LOI) for 20 circles at that time. However, on Dec. 6 it got licences for 14 circles only as it already offers GSM services through Reliance Telecom in the rest of the circles.

 

RCOM will now have to wait for the DoT to allot 4.4 MHz of GSM spectrum in each of the circles to launch commercial operations. The DoT has said that RCOM will be allotted spectrum only after existing licence holders such as Vodafone, Aircel and Idea, besides other existing players that have applied for a pan-India licence are granted spectrum. Leading GSM players like Bharti Airtel, Vodafone Essar and Idea have challenged the DoT policy on fresh spectrum allocation as also the move to allow use of dual technology. The matter is being examined by a panel set up by the Government in order to resolve the current stalemate in the telecom sector over spectrum allotment.

 

Separately, reports suggested that DoT was ready to issue Letters of Intent (LoIs) to 16 companies, including By Cell, Swan, Cheetah, S Tel, Parsvnath, Datacom, Unitech, Shyam, BPL Mobile and Indiabulls, for starting mobile services. All these companies had applied for licences before Sept. 25. More than 40 companies had applied for licences before the Oct. 1, deadline set by the DoT. Such marquee names as AT&T, Sterlite, Videocon, DLF, Ispat and Moser Baer, are said to have been denied the LoIs, and reports said they could go to court over the move.

 

Bush unveils subprime rescue plan

 

The Bush administration announced a rescue plan for the beleaguered housing sector that will freeze interest rates for some category of subprime mortgage borrowers for five years to stem the ongoing meltdown. "The holidays are fast approaching and this will be a time of anxiety for Americans worried about their mortgages and their homes," US President George W. Bush said. The administration's efforts, he said, are a sensible response to a serious challenge. Bush released his plan on a day the Mortgage Bankers Association reported that the number of mortgages entering the foreclosure process in the July-September period set a new record.

 

Bush insisted that the US economy's fundamentals were sound. But critics said his administration was slow in reacting to the housing crisis and that the delay had worsened the correction. Some termed Bush's plan as too narrowly focused. "The Bush plan is months late and more than a million families short," Democratic presidential candidate John Edwards said. One of Edwards' rivals, Sen. Hillary Clinton, dismissed Bush's effort as "too little, too late" and said it would exclude 400,000 families whose interest rates on their mortgages are resetting in the final three months of this year.

 

The Bush plan will only cover mortgages resetting from Jan. 1, 2008, through July 31, 2010. The freeze will be available only to homeowners who have not fallen behind on their payments at the lower introductory rates and who are living in the homes. This requirement would exclude people who bought investment properties hoping to profit from the housing boom. Also excluded are people who can afford the higher payments. The bush administration expects these people will move as soon as they can to refinance to more affordable fixed-rate loans. White House said its plan could help 1.2mn homeowners.

 

But, the Center for Responsible Lending estimated that only 145,000 homeowners would benefit because of the narrow criteria. An estimated 1.8mn homes have subprime mortgages that are scheduled to reset in the next two years. Those mortgages were initially taken out with rates of around 7-8%. Under the scheduled increases, the rates will climb as high as 11% in the coming months without the freeze. That increase could add an additional US$350 to a typical monthly mortgage payment of US$1,200.

 

Challenges increase for Indian banks: Fitch

 

Fitch Ratings has today said that the tightening bias of India's monetary policy, together with increased consumer leverage and the appreciating rupee could impact the immediate prospects of the country's banks.

 

Asset quality has come under some pressure, particularly in consumer loans that grew rapidly in the past and has now started to season, forcing banks to re-examine the loss assumptions in some parts of the business.

 

Fitch would therefore likely be increasingly cautious in its near-term outlook on the performance of Indian banks; the banks, however, will continue to benefit from the growth opportunities in the economy given their dominant status as financial intermediaries - the strong investment cycle currently underway is the new growth engine for bank credit.

 

In the report titled "Indian Banks - Annual Review and Outlook", Fitch observes that while the increase in net income of Indian banks remained strong at 25% yoy during H108 (24% in FY07), on the back of loan growth and lower mark-to-market depreciation on government securities portfolios, the rise in net interest income was more sedate at 11% in H108 reflecting the pressure on net interest margins. The slowdown in loans growth in FY08, together with any increase in loan loss provisions, could therefore affect net income.

 

NPL ratios will remain under focus, particularly in consumer loans where rising interest rates and increased consumer leverage has affected borrowers' repayment capacity, leading to growing delinquencies in the unsecured loan portfolio. Asset quality in residential mortgage loans (accounting for about half the retail loan portfolio) has held steady, but could be vulnerable if rising interest rates are accompanied by a correction in property prices. The appreciation of the rupee against the US dollar could affect the smaller exporters of textiles; banks have reportedly restructured some of their exposure to this segment in FY08.

 

The ability to raise timely capital could remain a key differentiator between banks, given that internal capital generation is unlikely to meet the requirements of growth in risk weighted assets, as well as the increased capital charge for operational risk and the need for government banks to make additional provisions for pension liabilities. The larger private banks have demonstrated greater capabilities in raising capital in a timely manner.

 

Preference shares have been added to the list of hybrid capital that banks can issue; however, credit spreads in the international markets (that have been the largest source of hybrid Tier 1 capital for Indian banks) has dramatically widened since July 2007 following the global tightening of liquidity, forcing banks to postpone their plans to issue these instruments overseas. The need to access capital may come into sharper focus if the credit cycle deteriorates, which could well provide an impetus for consolidation.

 

US adds more jobs than forecast

 

The US labor market was slightly stronger than expected in November, the government said on Friday, with the world's largest economy adding 94,000 nonfarm payroll jobs last month, the Labor Department said in a mixed report. Economists had been looking for around 70,000-85,000 new jobs.
Payrolls had risen a revised 170,000 in October while the September reading was revised lower by 52,000 jobs. Payroll growth in September and October was revised lower by a total of 48,000.

 

The unemployment rate remained at 4.7% for the third month in a row. Economists had been forecasting a rise to 4.8%. The job growth came from the service sector as manufacturing lost 11,000, while construction employment fell by 24,000.

 

Meanwhile, a separate survey of households showed the strongest job growth in nearly six years, with 696,000 more people saying they had jobs in November.

 

Ahead of the report, economists were expecting the Federal Reserve to lower its overnight lending rate by a quarter percentage point to 4.25% at its meeting on Tuesday, but some market participants are looking for a half-point cut. he Fed has cut the target rate by 0.75 percentage point over the previous two meetings.

 

Interest rates...BOE cuts; ECB holds

 

As expected, the Bank of England (BOE) slashed its key interest rate by 25 basis point while the European Central Bank (ECB) left its benchmark rate unchanged, as central bankers in the two regions remain concerned about the current turmoil in the financial markets and tightening credit standards. The BOE cut its key interest rate by a quarter-point to 5.5% after economic data in the previous few days showed a sharp slowdown in consumer confidence and in services sector growth. The rate cut is the first since August 2005 and comes after five hikes since August 2006. Meanwhile, the ECB left Eurozone rates unchanged at 4%, as the threat of slower growth in the 13-country bloc overshadows the dangers posed by higher inflation. The decision was widely expected as ECB says it needs more time to assess the fallout from the global credit squeeze. ECB President Jean-Claude Trichet threatened to raise interest rates if an oil-driven jump in inflation spurs pay increases. "There is strong short-term upward pressure on inflation," Trichet said. The ECB will not tolerate second-round effects on wages and some policy makers wanted to raise rates as early as today, Trichet said.

 

OECD slashes world growth forecast

 

The Organisation of Economic Co-operation and Development (OECD) cut its growth forecast for its 30 members, citing the ongoing correction in the housing sector and tight credit conditions. The lobby group for the world's 30 most industrialised nations also asked the US Federal Reserve, the European Central Bank (ECB) and the Bank of Japan to hold interest rates while saying that the Bank of England (BOE) could cut borrowing costs. The global economy will slow in 2008 as housing markets cool and credit conditions tighten, but the US will avoid a recession and the outlook is not that bad, the OECD said in its semi-annual "Economic Outlook" report. The government-funded economics body grouping of 30 advanced nations also warned that there are signs that China's economy is overheating, and urged the country's government that faster appreciation of its currency would be in its own interest.

 

OPEC keeps output unchanged

 

The Organisation of Petroleum Exporting Countries (OPEC) defied calls for production increases from consumer nations and left their current output levels unchanged, sending oil prices above the US$90 per barrel mark briefly. The oil cartel, which pumps more than 40% of the world's oil, will hold production for now and meet again in January. OPEC ministers met in Abu Dhabi to take a call on output ceilings. The freeze on supply met the expectations of most analysts. Crude oil was very volatile during the week, plunging and recovering sharply often during the course of a single trading session. It fell to a six-week low early on Thursday, but before the end of the session it recovered to settle 3% higher. US crude stood 1 cent up at US$90.24 on Friday, having jumped US$2.74 in New York on Thursday. London Brent was 4 cents up at US$90.22.

 

Chinese steel firms may launch rival bid for Rio Tinto

 

Shares of Chinese steel companies rose after a local newspaper reported that Baoshan Iron & Steel (Baosteel) may lead a rival bid by Chinese steel producers for acquiring Anglo-Australian mining major Rio Tinto. Baosteel may bid at least US$200bn for Rio Tinto, topping the US$142bn takeover proposal by BHP Billiton, Chairman Xu Lejiang told state-owned newspaper 21st Century Business Herald. However, the Baosteel Chairman later denied media reports that the company was considering a bid for Rio Tinto. Separately, China's largest steel company called on the Australian government to intervene to prevent BHP Billiton from taking over Rio Tinto. Rio Tinto's CEO Tom Albanese said that BHP Billiton's US $140bn takeover proposal to combine the two companies was "dead in the water". Albanese also revealed that other suitors had approached Rio Tinto since BHP Billiton's bid emerged last month, but added that it wanted to stay independent.

 

Vivendi to acquire Activision for US$9.8bn

 

French media giant Vivendi announced it was acquiring a majority stake in Activision for US$9.8bn to create the world's largest independent video game publisher. The new company, to be known as Activision Blizzard, will be positioned as a rival to current leader Electronic Arts. Vivendi would pay US$27.50 per share and make a cash infusion of US$1.7bn to acquire a 52% stake in Activision, valuing the combined company at US$18.9bn. Vivendi will then fold its game operations into those of Activision in the new company. The new company plans to repurchase US$4bn worth of its shares for US$27.50 each, a move the merger partners said would increase Vivendi's stake to 68%. The purchase price represents a premium of 24% over Activision's closing price on Nov. 30 of US$22.15 a share. The new entity would trade on the Nasdaq stock market. The merger is expected to be completed in the first half of 2008.

 

ArcelorMittal to make mandatory offer for Chinese firm

 

ArcelorMittal said it would make a general offer for China Oriental Group Co. to comply with the regulatory requirements in Hong Kong. The world's biggest steel maker by production capacity will offer to pay at least HK$12.9bn (US$1.7bn) for shares in China Oriental it doesn't own. ArcelorMittal said it intended to maintain China Oriental's listing after the close of the general offer, which comes after it bought a 28% stake in the Hong Kong-listed company on Nov. 7 for US$647mn. The Hong Kong Securities and Futures Commission (SFC) accused ArcelorMittal of colluding with China Oriental's Chairman Han Jingyuan in acquiring a majority stake in China's only listed steel company not under state control. It also lambasted ArcelorMittal, Jingyan and their advisers for an almost total absence of consultation. Jingyuan controls 45% of China Oriental. The offer of HK$6.12 a share is 13% higher to the last traded stock price of HK$5.40. China Oriental has been suspended from trading in Hong Kong since Nov. 7. The bid would value the whole company for at least HK$17.9bn.

 

Govt asks airlines to clarify tax on airfares

 

The Government asked all airlines to clarify as to what are the charged tax components and provide confirmation whether all the taxes shown by them in their tickets/website are deposited with the government. The airlines were also asked to submit the record of the taxes deposited with the Government at the earliest. In a letter dated Dec. 4, the Director General of Civil Aviation (DGCA) said perusal of the fares shown on the airlines' web site has revealed that the airfares have two components - basic fare and taxes. However, it is not clarified as to whether components like Passenger Service Fee and Fuel Surcharge are included in the basic fare or have been clubbed under the heading of taxes. The actual amount passed on to the Government is only the passenger service fee (PSF) of Rs225 per sector. Therefore, passengers have complained that they are forced to pay Rs2025 under the head of 'taxes and levies' while the Government charges only Rs225 as PSF.

 

OVL to join Hindujas in Iran oil & gas projects

 

Notwithstanding pressure from the Americans to reduce trade relations with Iran, India is pressing ahead with its economic interest with the Islamic nation. In line with this trend, ONGC Videsh Ltd. (OVL), in partnership with the Hinduja Group, is eyeing a 50% stake in Iran's South Pars gas field, arguably the largest in the world. The two partners are also believed to be in talks for a 50% stake in Azadegan - one of the world's biggest onshore oil blocks. OVL and the Hindujas are in talks with Switzerland-registered NICO, a subsidiary of the National Iranian Oil Co. (NICO). OVL and the Hinduja group are planning a project-specific JV restricted to the Iranian projects, a business daily said. OVL is likely to hold a majority 51% stake in the proposed JV while the Hindujas will own a 49% interest, it added. Azadegan is estimated to have 33 billion barrels of oil while the South Pars gas field contains about 50% of Iran's gas resources. South Pars is jointly shared by Iran and Qatar.

 

IFCI up as Board clears loan conversion to equity

 

IFCI allowed banks and financial institutions to convert 100% debt worth Rs14.79bn into equity. Public sector banks agreed to convert their entire holdings in Zero Coupon Optionally Convertible Debentures (ZCOCDs) into equity and the IFCI Board approved the same. LIC, GIC and associates agreed to convert a part of ZCOCDs into equity in such a way that they would retain their holding in IFCI in percentage terms at the existing level of 13.67%. IFCI also said it was in discussion with multilateral institutions to sell a stake in it. Earlier in related news, a financial daily reported that World Bank's private investment arm IFC was to take a 20% stake in IFCI. Meanwhile, of the eight short-listed bidders, only four carried out due diligence on IFCI. These were: Sterlite Industries-Morgan Stanley; WL Ross, US Capital Partners VI Fund, Standard Chartered Bank and HDFC; Cargill Financial Services Corp. and Texas Pacific Group (TPG); Shinsei Bank, PNB and JC Flowers. The remaining bidders, namely GE, IDFC, Natixis and Blackstone are yet to conduct the due diligence. The last date of submission for financial bids has been fixed as Dec 14. The IFCI Board is expected to announce the strategic investor by Dec. 20.

 

Anil Ambani to inject fresh equity into REL

 

The Board of Reliance Energy Ltd. (REL) approved a proposal for new equity capital infusion of up to Rs80bn into the company. The new equity capital infusion is proposed through a preferential offer of equity shares and/or equity related securities to Reliance-Anil Dhirubhai Ambani Group (ADAG). The preferential offer, which is subject to necessary approvals from shareholders, will be made at a price of Rs1,812 per share. Life Insurance Corporation (LIC), New India Assurance, Oriental Insurance, General Insurance, National Insurance and United India Insurance, which have been long-term shareholders of the company over the past several decades and who collectively hold about 18% of equity, will be provided an opportunity to participate in the proposed offering. The new equity capital will substantially enhance REL's net worth, and further augment its borrowing capabilities.

 

Kuwait Petro eyes refinery projects in India

 

Kuwait Petroleum Corporation (KPC), the National Oil Company of Kuwait is keen to participate in setting up grass root projects in India in the oil and gas sector. This was conveyed by Saad A. Al Shuwaib in a meeting with the Minister of Petroleum & Natural Gas Murli Deora. Saad said KPC is exploring opportunities in the refinery and petrochemical activities. KPC is in talks with Indian private and public sector undertakings to build large-scale refinery and petrochemicals projects in the country. The company is in talks with Reliance Industries (RIL) and others, including Indian Oil Corp. Ltd (IOC) for the proposed projects. "We would like to have something in India. We are looking for something either with Reliance or any other company," Saad told reporters after meeting the Petroleum Minister. He categorically stated that KPC was not looking to buy stakes in existing refineries. "It could be greenfield or joint acquisition," he said.

 

DLF to enter MF biz with Prudential Financial

 

DLF Ltd. and US-based Prudential Financial Inc. signed an agreement to establish a joint venture company in India, subject to regulatory approval. The joint venture with Prudential Financial marks DLF's entry into the asset management business. The agreement allows Prudential Financial to expand its international investments business and marks its official entry into the Indian mutual fund market. Under the terms of the agreement, Prudential Financial will be the majority shareholder in the joint venture with a 61% stake, while DLF will own the remaining 39%. The asset management joint venture will be based in Mumbai and will provide a broad array of mutual fund and investment products. The new company will be named DLF Pramerica Asset Managers Pvt Ltd. It will use Prudential Financial's distinctive Rock brand, combined with DLF's brand.

 

Eicher Motors shares up on Volvo JV news

 

Shares of commercial vehicle maker Eicher Motors jumped on Friday amid reports that it could form a Joint Venture (JV) with Swedish auto major Volvo. A business news channel reported yesterday that Volvo could move its India business into the proposed JV with Eicher Motors. Meanwhile, a financial daily reports that Eicher Motors' commercial vehicle business is up for sale and Volvo, along with German auto giant Daimler are among the interested parties. A deal is likely to be announced shortly and will be 50% higher than the current market price, it added. Later on Friday, Eicher Motors said its Board of Directors will be held on Dec. 10, to discuss a proposal for strategic partnership in relation to the company's commercial vehicle and allied business that the company has received. The news about Volvo and Daimler being in talks with Eicher Motors, as well as other CV makers like Ashok Leyland, have been floating around for a while now. But, so far neither Volvo nor Daimler have been able to strike any deals. Japanese auto maker Nissan recently announced a tie up with Ashok Leyland for making CVs.

 

Suzuki aims to keep 50% market share in India

 

Japanese auto major Suzuki Motor Corp. said it was aiming to keep its 50% market share in India forever notwithstanding the ever growing competition. The head of Japan's leading manufacturer of compact cars said that the company will launch new models and increase its dealer network to maintain 50% share of the Indian passenger car market. "We can't let newcomers break our 50% share that easily. We're going to do everything we can to keep that level for eternity," CEO Osamu Suzuki said at the Foreign Correspondents' Club of Japan. The Japanese company plans to introduce new and improved models like the Swift hatchback and SX4 crossover to ensure that it maintains its dominant position in India. Shinzo Nakanishi, soon to be Maruti Suzuki's new Managing Director said that the company would likely boost its sales outlets to about 1,000 in the next five to 10 years from about 550 now.