Markets shudder as war nerves tingle
S&P warns of rating blow
Rupee to remain under pressure
Rover in talks to acquire stake in Telco
Lever attunes bonus scheme to tax norms
Daewoo traces new recovery path in India
Focus on Vadodara unit as RIL takes control of IPCL
Make hay while the Sun scheme shines
Operation cover-up at co-operative banks
Foreign Exchange, Bullion, Stock Indices

 
 
MARKETS SHUDDER AS WAR NERVES TINGLE 
 
 
FROM OUR CORRESPONDENT
 
Mumbai, May 20: 

Sensex at lowest point in 4 months

War fears pummelled markets with shares ending near four-month lows, the rupee hitting another lifetime low against the dollar and government bond yields finishing under five-month highs.

The Bombay Stock Exchange (BSE) sensex rappelled down to 3282.81 on fresh selling pressure from speculators as well as local financial institutions.

The sound of battle drums muffled positive notes arising out of the sale of 26 per cent in IPCL to Reliance. Speculators and retail investors turned skittish in the wake of reports that the Indian army has been asked to retaliate for any action across the border.

On Sunday, the government put para-military forces under the Army and Coast Guards under the Navy, a sign of its readiness for possible military action.

The session was not bleak all through: the 30-share index rallied sharply to its intra-day high of 3361.77 on the back of buying triggered by the IPCL selloff.

Later, as the day wore on, it ran into strong resistance and plumbed its low at 3274.62 before ending at 3282.81. Measured against Friday’s close of 3333.76, the sensex lost 50.95 points, or 1.53 per cent. The broad-based BSE-100 index dropped by 27.50 points to 1645.18 against its previous close of 1672.68.

The war nerves also jangled in Pakistan, where the Karachi stock exchange lost 132.75 points or 7.4 per cent, the largest fall in a single day since June 1998 and closed at a four-month low of 1,651.26 after the bourse reported a late adjustment. Investors withdrew from the market amid fears a was imminent.

Back home, the fall was accentuated because of heavy sales by Unit Trust of India and Life Insurance Corporation.

In the specified group, 151 shares, including 26 from the sensex, suffered losses while 15 others closed with gains. Business was sparse with volumes pegged at Rs 1086.11 crore, down from Rs 1332.03 crore on Friday.

Polaris soft was the top traded share with a turnover of Rs 83.95 crore followed by Infosys Tech (Rs 80.85 crore), Satyam Computer (Rs 66.79 crore), GTL ltd (Rs 56.40 crore) and Zee Telefilms (Rs 52.66 crore).

The bse-200 index and the dollex-200 index were quoted sharply lower at 391.85 and 133.03 at close compared with last weekend’s finish of 400.87 and 136.18 respectively. The BSE-500 index tumbled 28.34 points to 1163.68 from 1192.02 while the dollex-30 finished lower at 549.59 compared with its last close of 558.46.

Rupee slips

The rupee weakened to 49.03 today, dragged down by dollar demand due to the mounting border tensions. It had tested 59.06 earlier in the day, but bounced back in a volatile session at the inter-bank forex market.

Heightened Indo-Pak tensions weighed heavily on the currency after banks went long on the dollar and pushed it down to 49.05/06 around noon. But, dollar supplies accumulated over the weekend trickled into the market towards the close of trading, helping the currency claw back, a dealer said.

The futures market was volatile too with sharp two-way movements. Forward dollar premia shot up due to paying pressure but eased later in the session.

The benchmark six-months forward dollar premium, payable at the end of October, closed at 144-142 paise, lower from a high of 146-144 paise early today.

In the government securities market, the actively traded 11.50 per cent 2011 paper was quoted at a lower price of Rs 122.10 — alternately, at a higher yield. Call rates closed firmer at around 7.10-7.20 per cent, higher from previous 6.75-7.00 per cent on Friday.

   

 
 
S&P WARNS OF RATING BLOW 
 
 
FROM OUR CORRESPONDENT
 
Mumbai, May 20: 
Leading international credit rating agency, Standard & Poor’s (S&P) today indicated that India’s ratings could suffer and the fiscal situation could deteriorate, if tensions with Pakistan escalate further.

Senior officials told a leading news agency in Singapore that S&P’s rating would “depend on how long this situation will persist and affect the (bond) yields or the fiscal situation.”

Yields on government securities have risen in recent times, which, it is feared, may increase the cost of funding the budget deficit.

Last August, S&P had said that it was lowering its long-term local currency sovereign credit rating on India to BBB minus from BBB, citing unchecked budget deficits and rising domestic indebtedness.

Though the agency at the same time affirmed its BB long-term and B short-term foreign currency sovereign credit and A-3 short-term local currency sovereign credit ratings for the country, it revised the outlook on both long-term ratings to negative from stable.

S&P had then warned that any further deterioration of India’s public finances could trigger a downgrade of its foreign and local currency sovereign credit ratings, though it added that a stronger economic leadership, building upon positive steps such as the lifting of quantitative restrictions on imports, could restore policy momentum and confidence in fiscal management.

   

 
 
RUPEE TO REMAIN UNDER PRESSURE 
 
 
FROM JAYANTA ROY CHOWDHURY
 
New Delhi, May 20: 
The government fears the rupee, which has already been battered in recent days, may be mauled further as war clouds loom menacingly over the sub-continent prompting corporate houses and foreign institutional investors to scramble for dollars.

The rupee is likely to tumble below the Rs 50-mark next month despite burgeoning foreign exchange reserves which have crossed $ 56 billion. In normal circumstances, this ought to have stabilised the value of the rupee if not actually helped it appreciate against some currencies.

“Our market intelligence is that forward premia are shooting up as corporate houses and foreign institutional investors are jumping in to buy dollars,” senior finance ministry officials said. “This is something about which we can do nothing.”

Merchant banker K.K. Sengupta explained even though demand from importers was weak, large corporate houses and FIIs have been buying dollars in the forward markets as they fear war risks might multiply the cost of fund transfers at a later date.

This has been happening even as growth in imports and exports has actually fallen into negative territory.

Although normal import trade has taken a beating, public sector companies which have to import raw materials or machinery later in the year have been scrambling to buy dollars, a fact that has not been appreciated by the finance ministry.

Officials also fear that in case of any major conflagration, a run on short-term debts and some amount of withdrawal by portfolio investors can be expected. This would obviously further weaken the rupee.

“We believe that foreign institutional investment will remain positive despite pressures. But there will definitely be a drawdown. Gujarat had triggered that in any case and it will be accentuated if tensions continue to mount,” officials said.

With exports expected to be hit in the short run due to the instability in Indian markets as well as depressed global demand, some within the ministry now feel that it should actually be drawing up plans to bolster the forex reserves “instead of frittering it away on pre-payment of debts.”

Even before tensions at the border escalated, the government has started working on plans to shore up exports with help from the chambers of commerce. “We have been taking their help in exploring non-traditional markets or markets where we are present but not in a big way like West Asia,” officials said.

However, they feel the best way to increase forex reserves would be to make new plans to attract investment and to export more manpower, especially in the software field. “We have already asked the ministry for communications and information technology to work out plans to tap new markets for our software and software professionals.”

   

 
 
ROVER IN TALKS TO ACQUIRE STAKE IN TELCO 
 
 
BY PALLAB BHATTACHARYA
 
Calcutta, May 20: 
Rover is in talks to acquire a strategic stake in Tata Engineering and Locomotive Company (Telco). Sources say it is likely to pick up 10 per cent in the initial stage, but its holding could go up later.

A senior official from Telco confirmed talks with Rover on various aspects, including equity sale, are under way, but he refused to divulge any further details. At present, the Tatas hold over 32 per cent in the auto major, banks and financial institutions have around 20 per cent and the public controls over 27 per cent.

Telco and Rover have been discussing the potential of forging various alliances that could yield benefits for both in an equal measure. These include exporting completely built units of Indica to the UK through Rover.

Telco, which is counting on Indica for a turnover leap, expects to ship around 70,000 units of the small car to the UK over the next five years if it can tie up with Rover. Sources said the British car major is also keen on an alliance with the Tata group firm ever since Indica started taking the Indian market by storm.

Rover does not have a presence in the small car segment, seen as a very high growth area in the European auto market. Indica has the potential to capture a good share of that continent if a deal can be reached with Rover, which has a strong marketing network.

Officials from Telco and Rover have visited each other’s manufacturing facilities recently, ahead of a possible alliance. Sources say the tie-up could be finalised before the end of the first quarter of this financial year.

Telco also has plans to manufacture some of its passenger vehicles, including Indica, at overseas plants. However, it is not known whether that proposition was discussed in the company’s talks with Rover. But, it is possible that Rover sports cars and utility vehicles are marketed by Telco in India, sources said.

Meanwhile, Telco is toasting the steep rise in demand for Indica in the domestic market. Sales of the car shot up 46 per cent — the highest in the segment — in 2001-02. In March alone, the sales were up 67 per cent at 8769 units, which is the highest-ever monthly tally for any car in the domestic ‘B’ segment, sources said. With the Indica boost, officials say Telco could bounce back into the black soon, if the rise is sustained. Telco had suffered a loss of Rs 500 crore in 2000-01 on a turnover of Rs 7927.63 crore, primarily because of the heavy interest and depreciation on the Indica project.

While interest charges stood at Rs 491.49 crore in 2000-01, depreciation was Rs 347.37 crore. The company has a secured loan to the tune of Rs 1,813.33 crore, including a term loan of Rs 200 crore from the State Bank of India and Rs 441 crore from banks on loans and cash credit accounts.

   

 
 
LEVER ATTUNES BONUS SCHEME TO TAX NORMS 
 
 
FROM OUR CORRESPONDENT
 
Mumbai, May 20: 
Hindustan Lever (HLL) today announced a special dividend of Rs 2.76 per share to be disbursed along with bonus debentures in an attempt to ease the tax burden on shareholders after the revised tax regime took effect under the Finance Bill, 2002.

The special dividend announced today would cost it Rs 608 crore. However, under the new Finance Bill, which puts the onus of paying dividend tax on shareholders, not the company, a sum of Rs 135 crore will not be deducted from its reserves as dividend distribution tax

In effect, HLL is issuing one bonus debenture of Rs 6 each per Re 1 share, as envisaged in the original scheme. It is also paying a special dividend of Rs 2.76 as part of the scheme. The special dividend has been calculated keeping in mind the shareholders who are in the highest income tax bracket of 31.5 per cent, the company said.

The entire tax on the bonus debenture and the special dividend will be deducted out of the special dividend. The special dividend, in turn, will be paid out of December 2001 profits, which stood at Rs 759.98 crore.

The scheme envisages the debentures to be redeemed after 18 months in one instalment, instead of the originally proposed redemption in two equal instalments, after 24 and 36 months. The change is due to the time that has passed since the scheme was first announced.

Thus, the reworking of the bonus debenture scheme will, in view of the non-applicability of the dividend distribution tax, require an additional Rs 473 crore.

Announcing the proposed changes in the bonus debenture scheme, Lever said it was done with a view to ensuring that the promised benefits are made available to shareholders in a fair and equitable manner.

In addition to a bonus debenture of Rs 6 each per share, Lever said it would also pay the special dividend of Rs 2.76 per share. “The entire tax on bonus debentures and special dividend will be deducted out of the special dividend, ensuring that the face value of the bonus debenture remains uniform at Rs 6,” the FMCG major said in a late-evening press release here today.

The revised scheme is, therefore, a self-financing one for tax-paying shareholders, even in the highest bracket of taxation, HLL said. Both the bonus debenture and the special dividend will be payable by reference to the same record date that is fixed for allotment of bonus debenture, Lever said.

After the budget was unveiled, the company had said on February 28 that it would study the new tax regime and accordingly revise the scheme. The reworking was necessary as the budget treated bonus debentures as “deemed dividend” for tax purposes that would now be taxed in the hands of shareholders. As a result of that change, the company said it was now under an obligation to make tax deductions at source (TDS), at rates prescribed for different classes of its investors.

   

 
 
DAEWOO TRACES NEW RECOVERY PATH IN INDIA 
 
 
FROM SHASHWATI GHOSH
 
New Delhi, May 20: 
Daewoo Motors India Ltd has a revival package on hand that has been approved by the Korean Development Bank (KDB), the main creditor of the South Korean carmaker which was carved up last month with the tastiest morsels—two plants in South Korea and one in Vietnam—being sold to General Motors along with a clutch of marketing franchises in Europe.

The revival package—it’s details are not known—is expected to give a fresh lease of life to the ailing Surajpur-based automaker which has ridden a stomach-churning roller-coaster from wild hope to deep despair over the past year as GM cherry-picked Daewoo’s worldwide assets that it wanted to buy.

It is also not known whether KDB will bankroll the package which the company put together under pressure from financial institutions in India which have been trying to recover their dues that have run up to more than Rs 900 crore.

This is the first positive news to emanate from Korea since the Indian operations were left out of the April 30 deal under which it can count on only three more years’ worth of key parts and licences from the plants that GM has bought. The three financial institutions—Industrial Development Bank of India (IDBI), ICICI, and Exim Bank—had recently moved the debt recovery tribunal (DRT) to press for repayment of over Rs 900 crore from the carmaker. Although the DRT has directed that the FIs will have the first charge on the company’s assets, the banks are prepared to give the company the opportunity to get back on the road to recovery.

Although company sources refused to confirm the revival package, well-placed sources in IDBI said, “We visited Daewoo Motors informally today to have a chat with the management. We want to see the company revive and the Korean Development Bank has agreed to our proposal. Daewoo Motors India has strong overseas support and huge investments in India. We do not want the company to wind up operations or sell its assets.”

The source denied that the financial institutions had approached anyone to consider taking over the Daewoo assets. Media reports over the past week have said the FIs had approached Telco and been turned down. “We have talked to no automakers for the takeover of Daewoo. We simply want a hand in its day-to-day running to guide it out of the mess,” the source said.

Hoping that the Indian operations would be taken over as part of the GM-Daewoo deal, DMIL had stopped all marketing and promotional activities of their product. The local management had been unwilling to draw up revival plans independent of the Korean carmaker. All that it has done over the past year has been to slash costs and trim the workforce. “We filed the case with DRT to put pressure on the company so that they would sit up and do something. We want to see some action from them. From now on, we will be a party to whatever they are doing including promotion of their models,” said the IDBI official.

Daewoo, which has a paid up capital base of Rs 792 crore, had run up accumulated losses of Rs 390 crore at the end of March 2001. With the addition of another Rs 212.80 crore, according to results published mid-year, it showed a 76.2 per cent erosion of capital.

Company sources said, “The capital erosion has worsened this year in the unaudited results. However, we have been able to pare costs because of extensive cost cutting. We have spoken with the banks—funds will continue to flow in and they will not immediately recall their loans.”

   

 
 
FOCUS ON VADODARA UNIT AS RIL TAKES CONTROL OF IPCL 
 
 
FROM VIVEK NAIR
 
Mumbai, May 20: 
Reliance’s success in acquiring the government’s stake in IPCL has thrown up various questions vis-a-vis the future of the latter’s petrochemical complex at Vadodara.

The cracker capacity of IPCL’s Vadodara unit is perceived to be way below international standards, and may require further investments from Reliance. Though many feel that it is “still too early” to list RIL’s specific plans for the unit, it is felt that the petrochemical giant will be faced with options ranging from leaving its present capacity untouched or expanding the same to further tighten its market leadership.

“The current capacity of the Vadodara cracker unit is over 1.3 lakh tonnes. This is, however, way below the global standards. Even the capacity of some of its polymer products is below that of RIL. Therefore, the plant’s cracker capacity has to be increased,” an analyst from a leading credit rating agency said.

It is also being speculated in some circles that in the long run, RIL may consider setting up a new cracker at the same site.

“IPCL’s cracker unit was the first to be set up when the company was established. It is a vintage plant and therefore there is a possibility that a new cracker may be put in place few years down the line at this site,” another analyst from a European brokerage pointed out. He estimated RIL may invest at least Rs 2,000 crore in the complex over the next few years to turn it into a world-class facility.

RIL had, late last week, acquired the government’s 26 per cent stake in IPCL in a transaction valued at Rs 1,491 crore for Rs 231 per share. Following this, RIL’s petrochemicals production would increase to a whopping 13 million tonnes.

Even as the acquisition price is being seen on the higher side by many, industry experts justified it on the grounds of the phenomenal synergistic benefits that RIL could be bestowed with.

Though few eyebrows have been raised, with some arguing that it leads to a monopolistic situation in a few product categories, analysts aver that this is unlikely to occur in an industry dictated by international trends combined with RIL’s practice of pegging the domestic price below landed prices.

Reliance had bagged IPCL in the face of stiff competition from Indian Oil Corporation (IOC) and Nirma. For IOC, the loss of IPCL is being seen as a disappointment in view of its ambitious diversification plans in the petrochemical arena. IOC officials when contacted, said that it would now focus on its existing refinery projects apart from its proposed petrochemical complex at Panipat.

While IOC has also expressed its desire to enter Haldia Petrochemicals Ltd (HPL), it is now felt that the corporation may dilute some of the stringent conditions placed on the latter in view of the loss of IPCL.

   

 
 
MAKE HAY WHILE THE SUN SCHEME SHINES 
 
 
BY A STAFF REPORTER
 
Calcutta, May 20: 
Disturbances — be it political, communal or due to exchange of fire across the border — are known to take the bottom out of investments, both in equities and fixed-income instruments.

So far, the common man had no means to switch to safer currencies and secure his money in difficult times like now. But, not any more — Indians can now invest in debt securities overseas through mutual funds.

Following the announcement to that effect in the budget this year, Sun F&C has launched a scheme — the first of its kind — that will invest its corpus in triple A rated foreign debt instruments.

People who put their money in the scheme will benefit from the depreciation of the rupee — something that rattles equity and debt markets at home. Since the investments will be held in foreign exchange — mostly dollar — depreciation of the rupee vis-à-vis other currencies will improve the net asset value.

The Reserve Bank of India requires such schemes to invest only in instruments with the minimum credit risk and in countries that have a triple A sovereign rating. Part of the proceeds can also be used to hedge the investments.

“There are 14 countries in which we can invest the proceeds of the scheme now. Among them are US, UK, Japan and the Euroland — the countries that use the Euro. In the beginning, we intend to invest in instruments maturing in less than two years. Such assets offer a yield of 3-3.5 per cent in the US. Add to it, the depreciation of the rupee to derive the actual return,” Nikhil N. Khattau, chief executive officer of Sun F&C said.

The rupee has depreciated over the last seven years, at a compounded annual rate of 6.2 per cent. Assuming that it continues to lose ground against the dollar at the same rate over the next few years, the annual return on investments would be around 9-10 per cent.

This is an ideal investment instrument for people like importers, whose business interests are linked to movements in foreign exchange. They need to hedge against rupee fluctuations, but there are hardly any legitimate means available. “The retail mass will come later, after the realisation that returns from a scheme investing overseas are no worse than those that park funds in domestic fixed-income instruments,” Khattau said.

The RBI has allowed Sun F&C to raise a maximum of Rs 17 crore under the scheme. “Going forward we will obtain RBI’s approval to invest more, but at this point, we cannot mobilise more than Rs 17 crore,” he said.

Buyout opportunities

Sun F&C is on the lookout for acquisitions. Khattau said: “What we are looking for, is a portfolio of say Rs 1,000 crore but the opportunity for inorganic growth is limited.”

Though he refused to speak on specific buyout targets, he admitted that the Sun F&C was evaluating opportunities internally. “If we manage to acquire assets, the cost would be borne equally by Sun F&C and its foreign principal,” he added.

   

 
 
OPERATION COVER-UP AT CO-OPERATIVE BANKS 
 
 
BY ANIEK PAUL
 
Calcutta, May 20: 
The urban co-operative banks that have been singed in the gilts scam are getting ready to cast a smokescreen around their dealings with Home Trade in order to conceal their losses and, thereby, the extent of their managements’ involvement in Sanjay Agarwal’s shenanigans.

Political parties, an army of chartered accountants and market intermediaries have banded together to engineer an accounting subterfuge that will obliterate all the evidence.

Most of the co-operative banks in the country — not just in West Bengal — are controlled by political parties. With leaders responsible for the management of these banks, much is at stake for the political parties.

The Nagpur District Co-operative Bank, which is at the centre of the controversy, is a case in point. Its chairman Sunil Kedar is a well-known NCP leader, who has been arrested for suspected connivance with Home Trade and its associate firms.

The cover-up began with the political parties trying to head off potentially embarrassing disclosures that would hurt their leaders. The vice-chairman of an urban co-operative bank in Calcutta, who is also a well-known leader of the local ruling party, said: “This is the Union government’s ploy to undermine the co-operative movement in Bengal, which it has always tried to subvert.”

The Reserve Bank of India is investigating the accounts of this co-operative bank to get a fix on its deals with Home Trade and its associate brokers, but the bank vehemently denies the inspection of its books. It also denies having ever entered into any transactions with Home Trade even as it goes into a huddle with brokers and chartered accountants to devise ways to clean up its books.

Government security brokers and chartered accountants say it will not be difficult to conceal the mess. All that the affected banks may have to do is obtain false contract notes indicating sale of the securities that they did not receive from Home Trade or its associate firms.

The securities that Home Trade did not deliver would then stand in the bank’s books as sold. Hence, the loss would not reveal itself even on comparison of the assets in possession with those stated in the books.

However, the bank will have to return the money received from the broker for the fictitious transaction. To do this, the bank will lend the amount into fake accounts, from which they will be withdrawn in cash and returned to the brokers.

The transactions would weaken the balance sheet of the banks to the same extent as the loss of securities. But the damage would be due to an increase in bad assets and not loss of securities, for which the management could have been hauled up.

The chairman of one of the co-operative banks duped by Home Trade went on record saying that the rogue broker offered 2-7 per cent commission on investments made through it. In most cases, as the arrest of Sunil Kedar indicates, the bank management had vested interest in transacting with Home Trade.

The Reserve Bank alone can pull up the management of the affected banks, but accounting manipulations will make their job quite difficult, a chartered accountant said, whose help has been sought by one of the affected banks.

Maharashtra guidelines

PTI adds: Following large scale irregularities unearthed recently in various cooperative banks, the Maharashtra cooperative department has issued guidelines for investments by such banks in government securities, cooperative commissioner Ratnakar Gaikwad said in Pune today.

As per the guidelines, the cooperative banks now cannot trade with share brokers and have to invest through subsidiary general ledger (SGL) account, state cooperative banks or through Stock Holding Corporation of India Ltd.

   

 
 
FOREIGN EXCHANGE, BULLION, STOCK INDICES 
 
 
 
 

Foreign Exchange

US $1	Rs. 49.03	HK $1	Rs.  6.20*
UK £1	Rs. 71.63	SW Fr 1	Rs. 30.60*
Euro	Rs. 45.14	Sing $1	Rs. 27.05*
Yen 100	Rs. 39.02	Aus $1	Rs. 26.65*
*SBI TC buying rates; others are forex market closing rates

Bullion

Calcutta			Bombay

Gold Std (10gm)	Rs. 5330	Gold Std (10 gm)Rs. 5180
Gold 22 carat	Rs. 5030	Gold 22 carat	   NA
Silver bar (Kg)	Rs. 8100	Silver (Kg)	Rs. 8115
Silver portion	Rs. 8200	Silver portion	   NA

Stock Indices

Sensex		3282.81		-50.95
BSE-100		1645.18		-27.50
S&P CNX Nifty	1074.35		-16.30
Calcutta	 113.61		- 1.36
Skindia GDR	 553.05		+ 0.97
   
 

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