ARC to get going in June
AllBank pledge
Reliance keeps shareholders on tenterhooks
Rethink on tax sops ruled out
Bharti fixed services set to touch capital

 
 
ARC TO GET GOING IN JUNE 
 
 
FROM JAYANTA ROY CHOWDHURY
 
New Delhi, March 2: 
The promised asset reconstruction company (ARC) will be set up to bail out both banks and public financial institutions laden with non-performing assets (NPA).

Top finance ministry officials said the ARC, which will be set up as early as June, will be used to clean up the books of both banks and FIs with equity participation by multilateral institutions like International Finance Corporation and Asian Development Bank.

Finance ministry officials speaking informally said loss-laden FIs like IFCI would also be allowed to sell off their bad debt portfolio to the ARC.

“It will be a private sector corporation and not deemed a public sector enterprise. This is being done to give it greater flexibility in debt sale and set-off,” officials said. Consequently, the government is reluctant to directly hold any shares in the ARC.

Besides multilateral agencies, domestic FIs like Life Insurance Corporation (LIC), ICICI, Housing Development Finance Corporation (HDFC) and Industrial Development Bank of India (IDBI) were being roped in to buy into the company’s equity. Though exact details have yet to be firmed up, officials said the equity base is likely to be around Rs 1,500-2,000 crore.

The ARC will be the first of a series which might be set up, officials said. The first is being set up as part of Union Budget promise made by the finance minister. Officials said FIs would be advised to also take advantage of the ARC window as they needed to get out of the long gestation infrastructure debts which have turned sticky. Banks alone have some Rs 56,000 crore in bad debt on their hands.

Though the gross NPA level has come down from 14 per cent to 13 per cent and net NPAs from 8 to 7 per cent, it is still considered a cause for grave alarm.

The FIs will be asked to continue to play their primary role of helping out huge infrastructure projects, officials said. But to give them better leeway in earning profits, they are being allowed to turn into universal banks. Many of them like ICICI want retail businesses and corporate finance to be new focus areas.

Most of these FIs had got into trouble in the first place because it had either lent to long gestation projects which had not started businesses and were unable to pay back loans or had lent to borrowers who had siphoned off money by padding up costs and had left behind projects which were financially unviable. This had led FIs, including IDBI, to consider turning into universal banks to improve their financial situation.

However, several regulatory glitches needed to be resolved before a promised move to turn IDBI into a corporate entity capable of becoming a universal bank. These include RBI requirements of capping promoter equity at 40 per cent and new merger norms, officials said.

   

 
 
ALLBANK PLEDGE 
 
 
BY SUTANUKA GHOSAL
 
Calcutta, March 2: 
The city-based Allahabad Bank will invest Rs 20 crore towards the equity of the ARC to be set up for taking over the non-performing assets (NPAs) in the banking sector and developing a market for securitised loans.

B. Samal, chairman and managing director of Allahabad Bank said, “We are probably the first bank to make a firm commitment of putting in Rs 20 crore towards the equity of ARC. The bank has already communicated its decision to the finance ministry.”

The ARC will have an equity of Rs 200 crore which will be funded both by public and private sector banks, financial institutions and multilateral agencies.

“One of the major issues affecting the viability of quite a few public sector banks is the high level of NPAs, that is, bad or doubtful debts which they are unable to recover. Making appropriate provisions for these NPAs affects the profitability of the bank and the government as the sole or major shareholder has to make up the shortfall,” he said.

The ARC would take over the bad debts and issue NPA swap bonds representing the realisable value of the assets transferred. The total NPAs in the banking sector are to the tune of Rs 56,600 crore. Public sector banks recovered Rs 12,860 crore in 2000-01 compared with Rs 9,883 crore in the previous year and net NPAs as a percentage of net advances came down to 6.7 per cent as on March 31, 2001, compared with 7.4 per cent in the previous year.

The Narasimham Committee on banking sector reforms had first recommended setting up of an ARC and an asset reconstruction fund.

   

 
 
RELIANCE KEEPS SHAREHOLDERS ON TENTERHOOKS 
 
 
BY ANIEK PAUL
 
Calcutta, March 2: 
The Reliance group has the largest shareholder base in the country, and one of the largest in the world, as befits the size of a Rs 60,000-crore group.

A consolidation within the group was imminent for some time, but it is still not clear whether the merger of Reliance Petroleum with Reliance Industries will be beneficial to the shareholders.

Analysts and traders are particularly concerned about the large equity base that would be created by the merger of the two companies.

“The combined entity may always remain somewhat undervalued on the stock markets due to its huge equity base and floating stock,” analysts said.

While Reliance Industries has an equity capital of Rs 1,053.75 crore, Reliance Petro’s equity base is Rs 5,201.66 crore. The merger of the two companies is expected to create an equity base of over Rs 1,500 crore, with the Ambanis holding 40-45 per cent in it.

“Companies with such huge free float—55 to 60 per cent—tend to remain somewhat undervalued in the long run. Besides, conglomerates, such as General Electric, have always confused analysts and shareholders as it is difficult for an outsider to determine which businesses are performing well and which ones not despite segmental disclosures. Valuation of such companies tend to remain depressed on the bourses,” an analyst said.

The market expects the swap ratio for the merger to be skewed in favour of Reliance Petroleum. “Not only does Reliance Petroleum have a better cash flow situation than the group flagship, it also has better growth potential.

“What is more, the promoters’ would have a bigger stake in the combined entity if the swap ratio favours Reliance Petroleum than Reliance Industries,” traders said.

The Ambanis hold 43.29 per cent in Reliance Industries and 65.25 per cent in Reliance Petroleum. The range being discussed on the street is one share of Reliance Industries for every 8 to 12 shares of Reliance Petroleum.

Analysts feel, in the near term the stock may perform strongly on the markets. The group has grand telecom plans and will certainly be a major player in petroleum.

The stocks’ near-term performance depends largely on the foreign investors. In recent times, foreign institutions have been exiting Reliance Petroleum. Foreign holding in Reliance Petroleum has fallen by 3 per cent—from 7.81 per cent at the beginning of this financial year to 4.75 per cent as of December-end.

The company’s global depository receipts—listed on the Luxembourg Stock Exchange—have witnessed heavy selling. Whereas at the beginning of the year GDRs constituted over 7 per cent of the company’s equity, it now constitutes merely 1 per cent.

Foreign holding in Reliance Industries, however, has consistently remained high. As of December-end, it was pegged at 25.33 per cent.

   

 
 
RETHINK ON TAX SOPS RULED OUT 
 
 
FROM OUR CORRESPONDENT
 
New Delhi, March 2: 
Revenue secretary S. Narayan today said the Union Budget for 2002-03 is a continuation of the Centre’s earlier policies and that any more tax sops would have meant increasing the fiscal deficit beyond 5.3 per cent pegged for 2002-03.

“Last year there were both tax and tariff cuts to stimulate demand. However, growth has failed to pick up. There are no more give-aways (tax sops) as it means printing more money (increasing fiscal deficit). Our borrowings have already gone up,” Narayan said at a post-budget meeting of the Confederation of Indian Industry (CII) here.

“Continuing in the same path would only make a bigger hole in the exchequer’s pocket. The budget 2001-02 saw a reduction in 15 per cent surcharge paid by the corporate sector and a reduction of the withholding tax on dividend from 20 per cent to 10 per cent on the direct tax front. There was also the abolition of the 24 per cent excise tax and a reduction in the 40 per cent rate to 32 per cent on the indirect tax. These measures led to a Rs 16,000 crore give-away to the corporate sector,” he added.

The government’s firm stance against industry’s demand for a cut in the corporate tax rate to 30 per cent from 35 per cent, lifting of minimum alternate tax and hiking investment allowance comes in the wake of lower revenue collections and burgeoning fiscal deficit at 5.7 per cent this fiscal.

Borrowings, which were over Rs 91,000 crore so far this fiscal, had to be pegged higher at over Rs 95,000 crore for the next fiscal.

Narayan said the 5 per cent surcharge on corporate tax would not pinch the industry too much as it effectively raises the tax rate by a meagre 1.05 per cent.

   

 
 
BHARTI FIXED SERVICES SET TO TOUCH CAPITAL 
 
 
FROM M. RAJENDRAN
 
New Delhi, March 2: 
Come Monday, Bharti Telenet Ltd will launch its fixed-line telephony services in Delhi, breaking the 16-year-old monopoly that the state-owned Mahanagar Telephone Nigam Ltd has enjoyed in the capital.

The company, which offers its fixed line services under the brand name Touchtel in Madhya Pradesh and Haryana, will now start its fixed line service in its third telecom circle.

At present, Mahanagar Telephone Nigam has more than 2 million subscribers in Delhi, of which about 25 per cent are corporate customers and rest are individual subscribers.

MTNL, which has been a monopoly operator since its inception on February 28, 1986, has been able to achieve a tele-density of only 14.30 per cent in Delhi. MTNL also provides fixed line and cellular services in Mumbai.

Bharti, which was one of the first private telecom operators to launch fixed line services in India (in Madhya Pradesh), plans to capture the 25 per cent corporate customers and 50 per cent of the individual customers in Delhi.

“It is a growing market despite the large presence of Mahanagar Telephone Nigam. We will not poach on their existing customers; but the customers in Delhi will now have an alternative service provider,” company sources said.

“We will focus more on offering value-added services and enhance customer services. The tariffs too will be very competitive, with different packages. The customers will not have to visit us to get a connection, but just call us and a connection will be provided by our representatives. We have set a target of attending to complaints within 24 hours,” sources added.

The company is also likely to unveil a special tariff package for corporate customers, packaged with a heavy dose of value-added services.

Reacting to the proposed launch of Bharti’s service from Monday in Delhi, a senior MTNL official said: “We welcome competition. The market share may change but we will also be able to show our strengths to our customers and if any lacunae remains it will be looked into.”

A senior Bharti Telenet executive said that they view: “Delhi telecom circle as one which has the highest per capita income and highest population density. It also has a high concentration of service and manufacturing industries, houses the central government, head offices of public sector enterprises, embassies and various government missions and development agencies, which we believe create a high growth potential for providing fixed line services.”

   
 

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