DOMESTIC fund houses may no longer find it attractive to launch fund of funds (FoFs), following the recent Sebi rule barring them from revenue-sharing arrangements with the schemes into which they invest. An FoF is a mutual fund scheme that invests only in other mutual funds.
While the Sebi move could sound the death knell for international feeder funds — a fund that routes money into a scheme investing in overseas markets — some industry officials feel even funds that invest in domestic schemes could be affected. According to distributors, top fund houses like ICICI, Birla Sunlife, Franklin Templeton, Fidelity, DSP Blackrock and DWS are reconsidering their plans to launch FoFs. According to the Sebi order, the Indian FoF will not be able to charge management fees on investments made by the target fund. The FoF fee structure adds up to around 3.25% annually. The fund house selling the scheme usually charges 75 basis points (0.75%) as commission from investors. It uses this money to meet marketing expenses, registrar fee and part of distributor commission. Separately, the target fund (where the money is invested) levies a fee of 1.5%-2.5% on investors in FoFs, a part of which is usually shared with the fund selling the scheme.
“By restricting revenue sharing, the
regulator intends to stop asset management charges at two points. From what we understand, it will also impact domestic FoFs, which invest into local funds,” said Ashvin Parekh, national leader-financial services, Ernst & Young.
According to Mr Parekh, most domestic FoFs follow a two-level fee pattern. Both source fund and the target fund levies about 75 bps (each) on investors as fund management charges. “The second para of the Sebi order clarifies that AMCs shall not enter into any revenue-sharing arrangement with the underlying funds and shall not receive any revenue from them. This widens the case for domestic funds as well,” said Mr Parekh.
According to experts, through this order, Sebi
intends to reduce charges on FoFs, and more specifically offshore FoFs, which have been charging investors heavily, but not yielding decent returns. Oneyear return on most FoFs has been in the range of 30-50%, much lower than category returns mapped by local funds. According to industry sources, it will no longer be profitable for fund houses to launch FoFs. An FoF occupies a special place in the product suite, as it allows a fund house to showcase investment products and asset classes that are popular in other markets. Domestic FoFs enable investors to invest across sectors and fund houses. Actually, most fund houses offering FoFs typically invest into their own sectoral funds, depriving investors an opportunity to have exposure to performing schemes run by other fund houses.
“The new changes will have implications for the viability of overseas feeder funds that fall under the FoF category, due to transfer pricing issues. But overseas funds being managed out of India will not be impacted. While this category accounts for a minor portion of industry assets today, we expect this to change over the coming years, given the benefits of international diversification,” said Jaya Prakash K, head-products, Franklin Templeton Investments.

NIFTY April futures opened the week on a negative note at 5200.30 levels and there was a selling pressure on Monday. Nifty April futures were low at 5180 levels.
However, good strength was seen from important support near 5200 levels and Nifty April futures made 52-week high at 5309.90 levels and closed the week at 5296.95 levels with 0.42% gains. Nifty March futures expired on Thursday and a long build-up was seen in Nifty April futures on Thursday and Friday, with an increase of 12.6% and 14.95% in open interest (OI), respectively. Also, April Nifty futures closed on premium for the past two trading days, indicating a long build-up in April Nifty futures.
As per international indices, Dow Jones, Nasdaq, S&P 500 and FTSE have been trading above their intermediate resistance levels, which may be positive for equity markets in Asia and Europe. Nifty PCR volume after making high at 1.13 on Tuesday, dropped down to 0.92 for Thursday and Friday trading sessions, which shows activity on the call side has been more aggressive, after Nifty March futures expiry.
Due to Nifty April futures expiry near month end on April 29 and positive global markets outlook, a long build-up was seen in 5300 and 5400 calls with 18% and 51% increase in OI & a short build-up was seen in the 5200 Put with a 12% increase in OI on Friday. India VIX also trading at 17.89 levels, indicating low fear level at current levels. Overall scenario represents bullish market with crucial support at 5200-5160 levels.
Increase in OI and positive price movement — a long build-up was seen in the IFCI stock from important support levels near 49 — and a long build-up was also seen in the APIL stock, which made 52-week high. A short build-up was seen in Unitech and DLF stocks. Healthcare, banking and FMCG have been the outperformers and the realty sector underperformed.
WHAT TO WATCH OUT FOR
INDIA
The finance ministry meet: The Finance ministry and central bank officials will meet on Monday to decide on the borrowing schedule. Traders will be watching the frequency, maturity and size of auctions.
Lancor Holdings: Lancor Holdings to consider, adopt and take on record the placement document for QIP issue.
Vakrangee Softwares: Vakrangee Softwares to issue 11 lakh equity shares having face value of Rs 10 each at a premium of Rs 60 per share to NJD Holdings.

ABOUT 50 companies increased their dividend rates this financial year, even as Corporate India, in general, was focussed on cutting costs, because of a lowerthan-expected topline growth.
With the business environment looking up as the year progressed, these companies announced one or more interim dividends, and pushed up the total dividend beyond what they had paid out last year.
Crompton Greaves, Engineers India, India Infoline, TVS Srichakra, Educomp Solutions, Garware Offshore and Kirloskar Oil are among high-profile companies that offered higher dividends to their shareholders. The rates of dividend, in fact, are the highest in recent years, going by dividend history of these companies.
“Higher dividend is usually an indication of better profitability,” said KR Choksey Shares and Securities Chairman Kisan Choksey.
“A good dividend track record helps in many ways. The company will be in a better position to raise funds from investors than those with poor dividend history,” he said.
Some analysts feel higher dividend payout need not strain a company’s financial health. Such a move is justifiable if a company is cash-rich and doesn’t require funds immediately for implementation of any project.
“A company should distribute a large amount of dividend only if it is able to generate incremental amount of cash every year,” said Anagram Capital CEO Mayank Shah.
A good dividend payout highlights the management’s confidence in the company’s prospects and helps in keeping shareholders’ morale high. It gives the company an edge over its competitors in terms of accessibility to the capital market for raising funds, added Mr Shah.
Crompton Greaves has paid a 110% dividend so far in the current year, compared to 100% in ’08-09 and 80% for ’07-08. The company reported a net profit of Rs 386 crore on sales of Rs 3,666 crore for the nine-month period ended December 31, ’09, compared to Rs 397 crore and Rs 4,659 crore, respectively, for the year ended March 31, ’09. Broking firm Anand Rathi Financial Services, in its recent research report, said Crompton Greaves has an adequate revenue visibility on account of the order backlog of Rs 6,100 crore and is expected to maintain its operating profit margin, which stood at 13.2% in April-December ’09, in future.
Engineers India is another major example where the state-owned consulting services major has paid a whopping 1,060% dividend (interim dividend of 1,000% and 60%) in the current year, compared to 185% and 110% in the previous two years.
According to analysts, the large dividend payout has been announced to benefit the government, which is the single-largest shareholder, ahead of divestment of the company. The government holds 90.4% in Engineers India, while institutional investors, including FIIs, own a 6.4% equity. Retail shareholding is only 2.7%. Engineers India reported a net profit of Rs 311 crore on sales of Rs 1,353 crore for the nine-month period ended December 31, ’09, compared to Rs 345 crore and Rs 1,532 crore in ’08-09.

THEbenchmark index of the Bombay Stock Exchange (BSE) logged its seventh straight weekly gains, rising 0.5% on Friday to its best close in more than 11 weeks, with financials and automakers leading the gainers, while top moble firm Bharti Airtel declined. Firm Asian markets supported the gains.
The main index Sensex rose 0.4% this week, registering its longest streak of consecutive weekly gains since last June, buoyed by continued liquidity inflow and earnings optimism. Bharti Airtel fell as much as 2.7% as the leading mobile operator moved closer to wrap up its $9 billion deal to buy most of Kuwaiti Zain’s African assets.
The deal could push up the Indian mobile operator by four notches to be the sixth largest mobile firm in the world by customers, but the management and finances will be stretched. The 30-share BSE index Sensex closed 0.49% or 85.91 points higher at 17,644.76 points, its best close since January 6. Eighteen of its components closed in the green. “There are expectations that we will see good March quarter results,” said Jigar Shah, vice-president of equity sales at Motilal Oswal, a Mumbai-based brokerage.
“Also, foreign institutional investors (FIIs) have been consistently pouring funds, which has led to a liquidity-driven rally,” said Shah. Foreign funds have pumped in around $3.5 billion in Indian equities so far in 2010, a portion of which was absorbed by offerings in the primary market. If March quarter earnings fell short of expectations, it would negatively impact the market, dealers said. Financials gained on optimistic prospects in an advancing economy.
Top lender SBI rose 1.1%, while ICICI Bank and HDFC Bank gained 1.9% and 1.2%, respectively. Mortgage lender HDFC rose nearly 1%. Automakers rallied on expectations of robust sales for the current month. Top vehicle maker Tata Motors raced 3.4%. The 50-share NSE index Nifty closed 0.4% higher at 5,282 points.

IS MARKET beginning to peak out? The shift in volumes from the largecap space to mid-, and small-caps would seem to suggest so, going by the conventional wisdom, say brokers. In the past few months, trading volumes in top 100 stocks by market capitalisation have shrunk by 30-40% as investors shifted focus to second-line names perceived to be relatively cheap.
“Valuation-wise, large-cap stocks look expensive, while many stocks in the mid-cap segment still offer value. Every other week, we are seeing investors take fancy to some new sector,” says Mehraboon Jamshed Irani, Sr VP-Equity, FCH Centrum Wealth Managers.
Even as retail investors continue to keep away from the market, most stocks in the second-rung space are being accumulated by proprietary desk of broking firms and mutual funds that have a mandate to invest in mid-, and small-cap counters.
Almost 2,000 companies on the Bombay Stock Exchange (BSE) are currently trading at or near their 52-week highs, as fund managers and investors bet on the next multi-bagger stocks. Large-cap stocks have been moving in a narrow range for many months now. This has prompted investors to look to mid-, and small-cap shares for higher returns.
“Large-cap stocks have already run up in the past few months and are trading at a high price-to-earning multiple (P/E). This is part of the cycle and people will continue to buy mid-, and small-caps till the valuation gap is filled,” says Bharat Shah, head-institutional sales, Ventura Securities.
“While large institutions hardly invest in companies outside BSE 200, it’s the domestic HNIs and some mutual funds which usually get attracted to these stocks,” he says.
Average daily volume in top 100 stocks by market capitalisation stood at Rs 2,860 crore and Rs 11,300 crore in November on BSE and NSE, respectively. This has come down to Rs 1,875 in the case of BSE and Rs 8,100 for NSE in March.
“While the participation from retail investors is low, it has slowly been picking up, as the market outlook has been improving in the past few weeks. But this time, the orders are smaller and the derivatives segment is a strict ‘no’ for them,” says the retail head of a domestic broking firm.
In the category of top 500 to 5,000 stocks, volumes have gone up from Rs 550 crore to Rs 822 crore for November in the case of BSE. In the case of NSE, for top 500 and above stocks in terms of market capitalisation, the turnover has almost doubled from Rs 400 crore to about Rs 785 crore.
Experts feel that there are still a good number of stocks available at reasonable valuations. But investors will have to be careful before buying them. While selecting, they should go for stocks with higher dividend yield and good earnings track record.
“Even if sentiment remains positive, the rally is expected to narrow down to select stocks in the next few days. Companies with a wide variation in quarterly earnings, and those with balance sheet problems should be avoided even if the shares have been rising of late,” adds Mr Mehraboon.
Experts feel that like in the past, shares of many fundamentally-weak companies have climbed to stratospheric levels, only to leave investors stranded later on. Investors should avoid risking their portfolio by putting in money in companies without checking their credentials.

PROSPECTIVE mutual fund and ULIP investors can now use the standard messaging service or SMS to make payments, rather than issuing cheques, while buying units. Icra Online has entered into a strategic tie-up with an international agency for setting up a new payment gateway in India.
Credit rating agency Icra’s tie-up with SWIFT, or Society for Worldwide Interbank Financial Telecommunication, is aimed at bringing down the turnaround time between making payment and receiving units in hand.
When an individual buys units of a mutual fund, he has a choice to make the payment through a cheque or by internet. Once this payment gateway is in place, the customer can instruct the fund house to use the payment gateway route. At the same time, he will be required to confirm the purchase or sale order to this payment gate company either through SMS or through email.
“This move will enable better fund management for asset management companies and also result in instant transfer of funds for customers,” said Sanjoy Banerjee, executive director at Icra Online.
Icra’s payment gateway
service could face stiff competition from private and foreign banks as they already provide customers the option to make their payment through the net banking route. “However, we are looking at tier-II and tier-III cities where the mobile penetration is high and usage of internet banking is very low,” said Mr Banerjee.
SBI Asset Management — the mutual fund arm of SBI — recently enabled its customers to make their payment through State Bank of India’ ATM debit card.
“The service will be available from the fourth quarter of 2010-11,” said Arun Tiwari, head of Indian-sub-continent at Swift. Icra Online and Swift will have to tie up with fund houses for offering this service. The Belgium-based Swift provides financial messaging network and facilitates transfer of funds between Indian and overseas banks.

MORE and more individual savers are preferring the government’s small savings schemes to bank deposits, a trend that could make it difficult for banks to meet their business targets.
According to projections made by the central bank in the October monetary policy, bank loans would grow 16% while deposits would rise 18% during the current fiscal. For this to happen, banks will have to lend almost Rs 130,000 crore by March, and mop up Rs 161,000-crore deposits.
The latest figures released by RBI show a 13.8% growth in deposits as banks have raised fresh deposits of Rs 529,221 crore between April 2009 and February 2010. The growth is lower than 16.8% recorded between April 2008 and February 2009. This is reflected in the sharp slowdown in term deposits of most banks. Fresh term deposits raised between April 2009 and February 2010 is Rs 483,653 crore, which is Rs 97,000 crore less than what they raised during the same period of the previous financial year.
Bankers attribute the slowdown in deposits to decline interest rates in the current financial year. “Interest rates offered by banks are very low compared to that offered by small saving schemes of the government. Thus there is very little interest to invest in bank-term deposits,” said Andhra Bank CMD RS Reddy. Small savings scheme offer 8% while banks’ offer around 6.5-7.5% on term deposits.
Also, there has been a conscious effort by many banks to slow down deposits mobilisation with loans failing to pick up. According to Bank of India executive director M Narendra, banks have not aggressively pushed for deposits this year because of a slowdown in credit offtake. “At the same time, there is a shift towards small savings scheme. But from the macro point of view, there may not be an impact on the overall savings rate,” he said.
Banks have been progressively reducing the return on term deposits since November 2008. Peak interest rates on a five-year term deposit has come down from 10% in 2008 to below 8% now. This has resulted in a shift of savings from banks to other avenues, including small savings
KIM
schemes such as post office monthly deposit schemes, National Savings Certificates and the Public Provident Fund (PPF). The interest rates on these schemes are fixed by the government and are capped at 8% for most of the schemes. Compared with bonds issued by the government, the small savings schemes are a more expensive form of borrowing.
Finance ministry data also indicate a surge in money flow into these schemes. Fresh mobilisations through savings certificates and deposits from April 2009 to January 2010 amounted to Rs 28,638.81 crore compared with outflows of Rs 13,816.49 crore in the year-ago period. A fresh inflow of Rs 11241.28 crore into PPF — another popular scheme — has come this year against Rs 196.90 crore in the year-ago period.

TRADING in interest rate futures is fast diminishing, with barely Rs 13 crore worth of contracts changing hands in March so far, compared with Rs 1,473 crore in September last year when the instrument was just relaunched. Interest rate futures (IRF) are used by fixed income traders for protection against adverse movement in interest rates.
The failure of the product to take off in India comes in the backdrop of IRFs being one of the most popular derivative instruments globally. Experts are blaming this on the extra advantage that the current set of rules give to the seller of the instrument.
“The underlying bonds are illiquid and cash settlements are not allowed,” says Jagannadham Thunuguntla, equity head, SMC Capitals, adding, “It is biased towards the seller of the contract as the buyer could end up getting delivery of illiquid securities.”
The local version of IRFs involve the seller delivering actual bonds instead of the difference in the predetermined and market price — a practice called physical delivery. In the stock and currency futures segments, this is done through exchange of cash.
In December last year, in a bid to boost volumes, the National Stock Exchange (NSE) had restricted the universe of securities that could be delivered as part of the physical settlement. From close to 19 securities, the number was brought down to six bonds. But this too has failed in having the desired effect.
Only three bonds account for 70% of the total volumes in the GSec market. Other bonds are barely traded, dealers point out.
Mr Thunuguntla also pointed out that the level of awareness among market participants about the product is quite low, restricting participation in the segment.
Arvind Konar, head of fixed income, Almondz Global Securities, says big players like insurance companies and mutual funds are still shy away from dabbling into the IRF space because of poor volume and liquidity issues. “This has become a self-fulfilling prophecy since a substantial amount of volume was initially expected from these large players,” he explained.
Earlier in June 2003, NSE had introduced interest rate futures contracts. However, market participants were not comfortable with its design. Globally, the interest rate derivative market is much bigger compared to major asset classes such as equity and equity derivatives. In the US, it is more than 10 times bigger compared to other asset classes.
Mr Konar says the absence of short-term instruments as underlying is also responsible for illiquidity. The only futures available currently are those with a notional 10-year bond as underlying.
According to experts, banks can be indifferent to yields for a quarter of their G-Sec portfolio, as it is classified as held-to-maturity (HTM) and does not have to be marked-tomarket (MTM.) Once the International Financial Reporting Standards (IFRS) is introduced in April 2011, volumes may pick up as the entire G-Sec holdings will have to be MTM on a daily basis, Mr Konar said.
The other key reasons, players said, is the rule restricting short sales and the absence of a well-developed corporate repo market.

ASLEW of mid-sized companies are gearing up to tap the equity market in the near term, piggy-backing on the prevailing feel-good factor in the market. This rush to raise capital may also see some companies with ‘not so good a track record’, pass muster, say merchant bankers. It is time for investors once again to err on the side of caution, they said.
A large number of mid-sized companies are raising Rs 25-200 crore via initial public offerings. While many have received the regulatory approval, many more have filed their draft red herring prospectus (DRHP) with the market regulator.
“This is a symptom of a bull-market cycle. At such times there is a need to go back to basics. Investors should look at management quality, the sector in which the company is present, its track record, irrespective of who is the banker to the issue, before taking a decision,” said Brijesh Koshal, head-investment banking at Daiwa Capital Markets.
Equity market flows, post a tepid start early this year, gained traction with purchases by foreign institutional investors (FIIs) touching close to $3 billion dollars in March 2010 alone. Portfolio investors have been net buyers to the tune of $3.11 billion year-to-date.
Equity analysts said that the feel-good factor that prevailed in a week dominated by ‘macro’ news flow — inflation rising to 9.9%, S&P upgrading India’s outlook to stable and the Reserve Bank of India raising rates in an inter-policy move — signals higher flows.
According to Prime Database, the issues that have received regulatory approvals and are likely to enter the market soon include AMR Construction(Rs 175 crore), Ankita Knitwear (Rs 25 crore), Aravali Infrastructure (Rs 100 crore), Kabirdas Motors(Rs 62 crore), Mandhana Industries (Rs 135 crore), PCI (Rs 60 crore), Sea TV Network (Rs 50 crore) and Usher Eco Power (Rs 52 crore).
“Apart from the quality of the book, pricing and valuations should play an integral role while subscribing to an issue,” says Nimesh Shah, MD of Fortune Financial.
Senior investment bankers are of the view that the market response to some of the mid-sized issues that listed in the past couple of months, has infused an element of optimism in companies in the mid-cap space that have been wanting to raise cash.
In a strange disconnect, while larger issues and PSU issuances saw lukewarm subscriptions, the smaller, mid-sized issues were not only oversubscribed several times but also listed with gains. A grey market premium added to the buoyancy. Issues like ARSS Infrastructure, Infinite Computer Solutions, DB Corp, Jubilant Food Works were among those which were subscribed by more than 25 times.

You manage around $1.5 billion in an India-dedicated fund. What is the overall view that you are taking on the region?
Wehave been fully invested in the past six months, because our view is that though valuations are not inexpensive, there is no extreme overvaluation at around 16.5 times forward earnings. There is a clear opportunity within the market in certain sectors and that is what has played out in the past six months. Certain sectors and stocks have played out better than the rest of the market.
What is your time and return horizon? What have you bought since you are fully invested?
We always ask our investors to come with a perspective of at least 2-3 years, because in the near term, the market can be choppy. Tomorrow, if you have any global sovereign crisis or something else, the market can quickly correct by 15-20%. But let’s realise that the emerging markets growth story is a real story. For instance, in the past one year, investors in our funds in Korean bonds would have made gains of nearly 150-160% across funds.
We feel that since valuations are not cheap, you will see a time correction. So, we expect the market to be range-bound till mid-June. And as inflation tapers off, it will peak off in early May or June. And as people draw more comfort from FY12 earnings, we expect the market to take the next leg-up from there. In terms of sectors, we are positive on financials. The sector has underperformed since last July but we are clearly behind the inflation harm. Apart from that, autos and pharma are the other interesting sectors.
If you were to review your portfolio at the moment, what would you get out of?
We have been booking some gains in commodities. The belief is that commodities, in general, and steel, in particular, may look slightly vulnerable, if we have some kind of a slowdown in China next year. Look at the steel intensity of that economy that’s nearly twice that of the US and other developed economies. So, steel is one specific space where we are booking some gains. In terms of increasing exposure, real estate is one space we have virtually very little exposure. So, we are gradually building our exposure into real estate. PSU banks have underperformed, and on every dip, we are looking to add to our positions in these banks.

MANY mutual funds may find it difficult to dole out magnanimous dividends to unitholders as seen in the past, with capital market regulator Sebi tweaking an accounting norm that will result in fund houses having lesser amounts for such payouts.
On Monday, Sebi barred fund houses from tapping the unit premium reserve to distribute dividends. Instead, it directed mutual funds to pay dividends only from realised gains, a move that has drawn hushed protests from the industry.
This is how it worked: For instance, if the face value of an equity diversified fund is Rs 10 apiece and its net asset value (NAV) rises to Rs 100, then Rs 90 will be part of the unit premium account (similar to accumulated reserves of companies). So, if an investor bought units at Rs 100 apiece, the dividends paid by the mutual fund would be drawn from the unit premium account, a practice which amounted to paying unitholders their own money.
As per the new rules, Sebi is asking mutual funds to pay dividends from profits booked in the event of a surge in the market. This means, if the NAV rises from Rs 100 to Rs 110, mutual funds can only use Rs 10 to distribute dividends, provided profits were booked.
“This step will certainly affect the quantum of dividend payouts by mutual funds, and more importantly, it will plug misselling,” said Rajan Mehta, executive director, Benchmark Asset Management. The revised norm will hurt most mutual funds and distributors, as they have churned fees in the past by luring investors, mainly affluent, into equity schemes for dividends. Mutual funds, through distributors, unofficially inform these investors their intention to pay dividend way before the dividend declaration date. These investors exit the scheme on or after this date, pocketing the tax-free dividend and setting off losses from mutual fund investments with other gains. Retail investors are known to buy schemes for dividends, without knowing that such payouts result in a corresponding decline in the NAV of the scheme, as dividend distribution reduces the size of the fund. “Dividend payouts in India was like taking money from the left hand of an investor and putting it in the right...retail investors did not benefit from this,” said a head of wealth management of a Mumbai-based broking firm.
Mutual funds feel the rules to pay dividends from realised gains are against the market regulator’s vision to encourage them to be long-term investors.
“Sebi is simply asking us to churn portfolios more, if we want to pay dividends. This new rule will turn fund managers into traders, as we are also under a lot of pressure to deliver dividends to retail investors, who are used to this practice for a long time now,” said a top official with a private mutual fund. “For example, investors, who had put Rs 10,000 into Infosys in mid-1990s, would have earned at least over a crore by now. In the pursuit of booking profits, we will miss out on such opportunities,” he added.
SEEKING FAIR PLAY
Sebi has barred fund houses from tapping the unit premium reserve to distribute dividends Regulator’s move will help check misselling Retail investors are known to buy schemes for dividends without knowing that such payouts result in a decline in the NAV

HOPES of better quarterly earnings, backed by improved refining margins, have fuelled the recent rally in shares of petrochemical giant Reliance Industries (RIL), the country’s largest private sector company.
The RIL shares have risen nearly 8% over the past week compared to a 2% rise in the 30-share Sensex, and closed at Rs 1,067 on Wednesday. According to analysts, the RIL’s decision to avoid getting into a bidding war for acquiring LyondellBasell could have also helped the shares firm up despite volatile market conditions. The RIL stock climbed nearly 4% compared to 1.3% rise in the Sensex on Tuesday. It was the most actively-traded stock on stock exchanges, clocking volumes and turnover of 15.1 lakh shares and Rs 159 crore, respectively, on the Bombay Stock Exchange (BSE). “Strategically, the deal would have boosted the company’s longterm growth prospects, though investors had some concerns about its short-term impact on the company. However, with the rejection of the RIL’s bid, investors have now started focusing on fourth quarter numbers,” said an analyst on condition of anonymity. Early this month, the board of LyondellBasell rejected the RIL bid to acquire the Netherlands-based bankrupt company, though the Indian company raised its offer from $13.5 billion to $14.5 billion.
“The current rally in the RIL shares has mainly been triggered by expectations of a boost in quarterly numbers amid better refining margins. We estimate the company to report net profit in the range of Rs 5,700 to Rs 5,900 crore during the current quarter compared to Rs 4,000 crore in the previous quarter,” said KR Choksey Shares and Securities’ research head Maulik Patel. The market was concerned that any further increase in bid for LyondellBasell would have affected value creation for RIL and so it reacted positively to the rejection of the latter’s offer.

STAKES in bank index’s futures contracts are mounting in the run-up to the Reserve Bank of India’s (RBI) announcement of the government’s borrowing timetable for 2010-11 Marchend and monetary policy meet mid-April. With traders expecting the government’s borrowing schedule to be detrimental to government bond yields and banks’ bond portfolios in the coming months, traders are creating positions that bet on a slide in Bank Nifty futures preceding and post-events.
“We are recommending clients to
short-sell Bank Nifty futures, as yields are rising and expected to firm up further,” said Siddarth Bhamre, head-derivatives, Angel Broking. “Traders can look at shorting Bank Nifty futures at around 9200, which is a strong resistance,” he added. The Bank Nifty index ended at 9102.95 on Tuesday. Bond yields and prices move in opposite directions. If yields rise, prices fall and vice-versa. Investors in government paper — the biggest being banks — rely on appreciation of bond prices for trading profits. Yields on the benchmark 10-year government paper have risen 40 basis points in over a month to around 8%, because of stubborn inflation and expectations of a higher
government borrowing in 2010-11 that
will increase the supply of sovereign paper during the year.
While the government has guided for lower net borrowings for 2010-11 in the Union Budget last month than last year’s, the borrowing schedule will give investors an idea on how does the central bank want to control the supply of paper into the market. Also, the market is awaiting comments from RBI on how it plans to “support” the market through open market operations (OMO), the secondary market activity and market stabilisation schemes (MSS). Investors in government bonds would want a higher “support” from RBI in the bond market this year, but few expect this outcome.
Most market participants expect the 10-year paper to rise to 8.25-8.5% in the next few months, as most of the government borrowing is expected in the first six months of the new fiscal. As a result, banks’ bond portfolios are expected to be negatively impacted. Given the bigger impact of this event on bank shares than on the broader equity market, traders are adopting a strategy that captures this outcome.
“A widely-used strategy is going ‘long’ on Nifty futures and ‘short’ on Bank Nifty futures, as Bank Nifty is seen underperforming the Nifty,” said Girish Patil, an manager-derivatives with Antique Stockbroking. This means, Bank Nifty will fall sharper than the Nifty or rise lower than the benchmark index. Another strategy that Mr Patil recommends is short-selling public sector banks and buying private banks, as further rise in bond yields is expected to impact public sector banks more because of their higher holdings of this paper. Edelweiss Securities estimates that the average impact of a 100-basispoint movement in government securities on public sector banks’ profit before tax would be 14% in 2010. But the impact would be lower this time compared to 2004-2008, it said.
“From an average of 80% in FY04, share of available for sale has come down to 25-30%, limiting the impact of investment depreciation,” it added.

LIMITED Liability Partnerships (LLPs) that seek foreign investment will not be allowed to set up subsidiaries to invest in other sectors. This is to ensure that the LLP structure is not used to circumvent restrictions on foreign direct investment. The government is considering allowing 49% FDI in LLPs.
The Department of Industrial Policy and Promotion (DIPP), which is preparing a note on the foreign direct investment framework for LLPs, thinks that allowing downstream investments by these entities will be difficult to track and sectoral limits on FDI could be breached.
“LLPs with foreign investment will not be allowed to create a subsidiary structure to route their investments,” a DIPP official told ET.
Experts say the restrictions will make the regime very restrictive for LLPs, a new form of business that combines best of partnerships and corporate structure.
“This would make LLPs’ onward investments very restricted and prevent them from entering into strategic alliances. Foreign investors will also need to set up a parallel separate LLP for each investment activity that they propose to undertake,” said Girish Vanvari , executive director, KPMG.
LLPs are business entities that are a hybrid between companies and partnership firms and provide a flexible tax regime having a lower rate of tax of 17% as against 30%(plus cess and surcharge) applicable for companies.
Besides, partners’ liability is limited in these entities to the extent of their stake in the entity. Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners and do not have to meet compliances related to meetings and maintenance of huge statutory records.
The new FDI guidelines issued by the DIPP—Press Notes 2,3, 4 will not apply to LLPs. Earlier, the RBI had written to the finance ministry suggesting that FDI be allowed in LLPs in all sectors up to 49% but with prior approval. Globally, LLPs enjoy a greater flexibility with regard to their investments though they are restrictions on investing in select sectors such as aviation in some countries.

FOR over two months now, India’s central bank has neither bought nor sold dollars from the currency markets. Instead it has let the dollar find its own level or value solely through the play of market forces.
The Reserve Bank of India intervenes in the foreign exchange market, depending on the level of the currency it is comfortable with. It sells dollars to prevent the rupee from weakening when demand exceeds supply and buys dollars whenever inflows are high.
Sometimes, to lessen the impact of such flows on domestic liquidity, the Reserve Bank also intervenes in the forward market, wherein there is no actual flow of currency because of the transaction. But in January, for which the data was released by the central bank last week, the RBI has not intervened even in the forward market.
The current stance of the central bank is intriguing mainly because the central bank is not buying dollars even though there have been inflows. One of the major source of dollar inflows is through the foreign portfolio investment route. Between December and now over $3 billion has been invested in the equities market. The central bank has not absorbed a single dollar and during this period, the rupee rose about 2 to 3%.
Economists covering other Asia Pacific emerging economies say that many central banks in Asia are not mopping up dollar inflows and letting their currencies appreciate.
A prime concern for the central bank these days is tackling high inflation. Though much of the inflation these days is on account of supply side factors, the central bank has a role in managing inflation expectations through its actions. By not intervening in the currency markets, the central bank to an extent helps containing inflation. For one, a strong domestic currency translates into cheaper imports, which in turn helps contain imported inflation (arising out of high prices of importables).
Also by not buying dollars, the central bank also tends to contain the growth in domestic liquidity. Whenever it buys dollars, it releases local currencies into the market. If these funds are in excess of what the system can absorb, then the central sells government bonds and mops up rupees- a process which is called sterilisation. There are fiscal costs involved in such transactions because the government has to service the bonds and the interest pay-out ends up being higher than the return on the dollar investments which are made out of the forex reserves. The RBI may thus be achieving multiple policy objectives by simply not intervening in the currency markets.

Private equity funds (PE funds) seem to be staging a comeback after their near withdrawal from Indian economic landscape in the wake of global economic meltdown in 2008. Deal activities have picked up significantly since last year and are expected to edge higher towards the end of the year.
According to recent studies, merger and acquisition (M&A) activities in the country more than doubled in the first month of 2010 as deals worth about Rs 13,950 crore were announced, signifying emergence of the country's economic environment after tough 18 months.
January saw as many as 29 domestic deals worth $2,3030 million compared to 14 transactions worth $589 million in January 2009. Telecom, logistics and banking and finance and insurance were the most targeted sector for investment with deals worth $ 2180 million, $ 164 million and $117 million, respectively, according to the study conducted by financial research services provider VCEdge.
In terms of investment, even though logistics sector came second to telecom, it is found to be increasingly attracting the attention of lot of PE funds. With traditional avenues for investments like real estate for residential and commercial segments still in doldrums, PE funds are looking at new avenues and are betting on the logistics sector.
Indian logistics sector is a collection of nearly 20 subsectors extending from ocean shipping to ports, from express courier to container rail, and from 3PL to warehousing and distribution. Even though the sector is highly fragmented, this very nature is also said to attract the PE funds, who have been playing an important part in industry consolidation by focusing on aggregating smaller players and building scale through numerous acquisitions. In fact, India has emerged as an important geography from the perspective of the PE interest in the transportation and logistics sector since the beginning of 2008. While the year
2008 saw 23 deals alone, 2009 was an year of caution for most PE players in India.
"It is difficult to ascertain the total amount that the funds have deployed in the logistics sector," said Vikram Utamsingh, executive director and head - markets and private equity at KPMG. "But," he added, "there would have been some 10 to 15 transactions in the logistics sector to date and so the amount invested would be in the range of $300 to 500 million."
"As the logistics sector emerges from its worst time ever, it is stronger, leaner and wiser but most of all ready for its next level of PE-backed growth," said Gautami Seksaria, founder and managing partner, Supply Chain Leadership Council, which has been fostering growth of the sector though a variety of forums.
According to industry players, the sector could see PE investments close to $1 billion in the next three years. PE funds are expected to pump in about 10-15% of their total investments in warehousing and logistics over the next two years.
According to real estate consultancy firm Cushman and Wakefield, warehousing activities account for about 20% of the total Indian logistics industry and offer tremendous growth potential. The warehousing segment of the logistics
industry is estimated to grow from $20 billion in 2007-08 to about $55 billion by 2010-11, growing at the rate of 35-40% per year.
Correcting a general perception that funds are facing financial crunch, Mr Utamsingh said that there are no such constraints. "In fact there are many PE funds that have a lot of "dry powder" as they did not invest much in 2009. Further, there have been several ones who raised funds in 2008 and 2009 and hence have a lot of capital to deploy. For example, Sequoia Capital raised $700 million for India, India Value Fund raised $ 725 million for India, Avigo Partners raised $150 million, CX Partners raised $ 200 million, Zephr Peacock raised $85 million. Some domestic funds also raised like Aditya Birla group - Rs 625 crore. So there are plenty of funds to deploy. But PE firms have become more cautious about investing and there has been a key shift from momentum investing to fundamental investing. There are still over 200 active PE funds in India including global funds like KKR, Apollo, TA Associates, Advent, who started their offices in India in 2009."
And for logistics companies looking to get that kind of money, he has this advice: "The companies need to shed their current image and professionalize or at least corporatise. They need to develop better governance principles so that they become more attractive for PE.

AFFLUENT investors had a couple of rare debt offerings to save on income tax this year. After a brief interval, the Indian Railway Finance Corporation (IRFC) mopped up close to Rs 2,000 crore by issuing tax-free railway bonds. This tax season also witnessed placement of two 54-EC capital gains bond issues by REC and NHAI, which together raised around Rs 2,300 crore.
The two ‘mega bond’ issues have attracted money from affluent investors who otherwise invested in mutual fund tax savers and ULIPs to save tax, according to wealth managers. The tax-free railway bonds got fully placed — collecting a little over Rs 1,900 crore — in just about three hours’ time, according to distributors. IRFC has pegged the coupon rate on bonds between 6.5% and 7.25% a year depending on the tenure (5-year, 7-year and 10-year-term available) of the tranche.
“The railway bond was a private placement issue, distributed among high net worth investors and a few corporates having large long-term cash surpluses,” said Ashish Agarwal, executive director, AK Capital, the manager to the issue.
“More money came into the 10-year bucket. Investors don’t have worries investing for longer term, as these are tradable bonds listed on exchanges,” Mr Agarwal added. According to wealth managers, the bonds are also used as collateral to raise money from the market.
IRFC has started the borrowing programme to fund its rolling-stock acquisition plans and meet rail modernisation expenditure. There are complaints that the railway bond issue was not advertised among retail investors in a big way. “Though the minimum investment limit was Rs 10,000, the issues were not given to retail investors. Most wealth managers were accepting investments of over Rs 2-3 lakh,” said a Mumbai-based independent finance analyst.
Tax-saving 54-EC capital gains bond issue by REC and NHAI also got a strong response from affluent investors. According to January figures, REC collected about Rs 500 crore, while NHAI raised over Rs 1,800 crore by way of capital gains bond issues. The issue had failed to attract buyers last year — issued towards the last months of the fiscal — as a result of the slump in real estate sector. In ’08-09, NHAI had raised Rs 1,630 crore against a target of Rs 3,000 crore. In ’07-08 and ’06-07, it had collected Rs 305 crore and Rs 1,500 crore, respectively, according to distributors’ logsheets. Falling real estate prices had brought down investments in capital bonds by about 30% during ’08-09, wealth managers said.
“Popularity is rising gradually for capital gains bonds. It will be even better next year, when property owners sell their asset at higher prices, assuming real estate price hold steady over the next one year,” said Harish Sabharwal, chief operating officer, Bajaj Capital.
Under income-tax laws, one can save on payment of capital gains tax if the amount is used for repurchase of property within a 12-month period. Alternatively, capital gains tax can be avoided by investing in capital gains bonds. These bonds bear a coupon rate in the range of 6.15 and 6.25%.

FOREIGN exchange reserves remained almost flat during the week ended March 5 as they rose only by $74 million to touch $278.4 billion. This was largely on account of revaluation of nondollar assets.
According to the latest data released by RBI, foreign currency assets rose $81 million during the week. Special drawing rights — the reserve currency with IMF, dipped $6 million and $1 million, respectively.
The dip in foreign currency assets during the week is largely on account of the dollar making strong gains against the euro, resulting in revaluation of non-dollar assets such as yen, euro and the sterling pound, expressed in dollars, pointed out a treasury official at a public sector bank.
Banks have continued to park funds in mutual funds. The total stock of money comprising cash, currencies and deposits rose by Rs 58,145 crore during the fortnight to touch Rs 54,16,963 crore as on February 26. At current levels, the annual YoY growth works out to 16.4% compared with 19.9% in the year-ago period.

THE Bombay High Court judgement that the drawer of a bounced cheque cannot be prosecuted if the instrument was issued only as a security has thrown traders into a tizzy.
Suppliers who were used to granting credit for series of transactions against a single cheque are now unsure of how good this security is. Debtors on their part while issuing the cheque are making it in the covering letter that the cheque is being issued as a security and not to meet any debt obligation.
Speaking to ET, Rajesh Narain Gupta, managing partner of SN Gupta and Co — a legal firm — said there was a lot of concern over this and the firm was being approached by both creditors and suppliers. “Debtors want us to draft a letter stating that the cheque is being issued as security while suppliers want to know what can they do under the circumstances,” said Mr Gupta.
Lawyers feel that there is scope for misuse of the legislation from both sides. In the past, lenders have used this Act to initiate criminal prosecution against borrowers who have found it difficult to pay their instalments. Now debtors are taking shelter under the judgement on cheques issued as security.
“Also, creditors at multiple levels, including banks and NBFCs, may be put to strict proof whether the cheque held by them is towards discharge of debt or held as a security. While on the other hand, the debtor or an issuer of cheque may abuse the process of law by building false defence taking shelter under the judgement,” said Mr Gupta.
An amendment to the Negotiable Instrument Act of 1881 was introduced more than a decade ago, which made cheque bouncing a criminal offence. There was a requirement that the cheque should be issued to discharge a debt or obligation. This Act had given lenders immense clout with most of them insisting on a post-dated cheque for the full amount of the loan. In case of home and auto loans, lenders, in addition to seeking post-dated cheques for the monthly instalment, take a security cheque for the entire loan amount. This allows them to bank the cheque and initiate criminal proceedings if the borrower fails to meet his monthly obligations.
Last month, the Bombay High Court held that the debtor cannot be prosecuted under the Negotiable Instruments Act if cheques, issued only as collateral security for loan, bounces. According to news reports, the judgement was issued by Justice PR Borkar on a petition filed by Ahmednagar-based Ramkrishna Urban Co-operative Credit Society against a debtor.

FINANCIAL markets were once again caught between the soundbites by an unnamed finance ministry official worried about rising bond yields and RBI deputy governor’s statement on Thursday that the central bank expects the borrowing programme to sail through comfortably.
However, RBI did give voice to the market’s worst fears that a credit hungry private sector and possible rise in the government’s borrowing, could come in the way of its successful execution of the sovereign borrowing programme.
“I keep talking to RBI people everyday on yields. They keep saying the yields are hardening because of inflationary expectations (despite the net borrowing target being low),” a finmin official was quoted saying a news agency. But deputy governor Subir Gokarn, at a seminar here, did flag off the central bank’s concerns on a possible rise in government’s borrowings. “There are risks that private sector borrowings would be higher than expected, the foreign
inflow could be lower and the government borrowing could be higher than anticipated,” he said.
Dealers and economists said the statement showed that RBI is gearing itself to tackle uncertain economic scenario, and expressed confidence that the central bank would rise to the task. Government bond prices rose on Thursday amid a rise in food prices fuelling inflation worries. Mr Gokarn, however, added that the Indian growth is looking fairly positive and global liquidity should help in the smooth sailing of the market borrowing programme.
The government has announced an overall borrowing programme of Rs 4.57 lakh crore for 2010-11 against Rs 4.51 lakh crore in the current year. The net borrowing target is set at Rs 3.45 lakh crore against Rs 3.98 crore borrowed this year, thanks to the large number of scheduled bond redemption next fiscal.
“At some point of time, RBI will have to face a reality where corporates look to boost investments,” said Jahangir Aziz, chief India economist at JP Morgan. “If an 8% GDP growth has to be achieved, then we cannot let the private sector run out of gas,” he told ET. He feels it’s unlikely that RBI would raise rates until the next policy review.
The yield on the 10-year benchmark bond has risen 30 bps in the past month on fears that rising wholesale prices would make an early monetary policy tightening inevitable.
Mr Gokarn hinted RBI was not looking at raising policy rates immediately, saying it would be “premature to take any mid-term policy action.”

FROM April 1, Indian corporates will have to bear a bigger slice of an insured loss from their own pockets. Till now, a company paid just Rs 10,000 out of its own resources if there was a fire or flood — insured events for which it had bought covers from non-life firms. Now, it will have to fork out as much as 5% of the claim, which could run into several crores.
Bitten by underwriting losses resulting from intense price war in the past three years, non-life insurers have taken a collective decision to fix a floor level for deductibles — the portion of risk required to be borne by the policyholder.
Although the industry association, General Insurance Council, denies that there is any agreement at the council level, brokers said at least two companies have issued identical circulars, which indicated a concerted effort by players.
For instance, a circular issued by Oriental Insurance sets out the minimum deductible applicable for all fire and engineering policies with effect from April 1. Earlier, the claims on policies with sum insured of above Rs 10 crore per location was Rs 10,000. Now the new limit is Rs 10,000, or 5% of the claim amount, which ever is higher. For a claim like the Indian Oil fire in Jaipur last year, the deductible would run into several crores, which will be a direct hit on the balance sheet of the company.
“The only discussion that took place in the council was that insurers should adopt prudent underwriting practices,” said a senior council official. Deductibles are considered a prudent underwriting practice to ensure that the policyholder has an interest in taking all loss prevention measures. Secondly, deductibles spare insurance companies of the administrative hassles involved in low-value high-frequency claims.
Deductibles not only reduce the claim payouts, but also substantially bring down the administrative expenses for general insurance companies. This would be a relief for non-life insurers who have been recording balance sheet losses amid a rate war that has left them bleeding. According to Pavanjit Singh Dhingra of Prudent Insurance Brokers, an increase in deductibles was expected as the current deductible levels were fixed in the ‘90s. “However, we believe that every insurer should ascertain and price risk according to their individual strengths and capacity. It seems that insurers feel that they cannot be individually disciplined enough to underwrite risks as per their own judgement and that a market agreement is required with all acting in concert to prevent one from undercutting the other,” he said.
The industry is also facing pressure from reinsurers. All reinsurance treaties are renewed with effect from April 1 and reinsurance companies are pressurising insures to be more prudent in their rates. “Treaties with non-life companies are not at all profitable and we are planning to put in restriction and are still discussing with the companies. However, we do not advise companies on either the rates or deductibles they should apply,” said GIC Re chairman Yogesh Lohiya.
“Another way of looking at this situation is that insurers are finding it difficult internally to enforce pricing discipline and are trying to curtail claims instead. From these steps and the difficulty that insurers are having with their treaty renewals makes us feel that we may see higher prices in the near future as well,” said Mr Dhingra.

WITH LONG-TERM CONTRACT PRICES FOR IRON ore for 2010-11 due to come up for annual review on April 1, the coming fortnight may prove difficult for both steelmakers and miners, globally. Domestic steel majors too are bracing up to face uncertain times ahead.
A high degree of volatility in ore prices in the past 1-2 years has forced large international miners and steel industry players to search for ways to devise a formula that will make prices more realistic and market-linked. While the existing system relies on fixed rates for long term contracts, internationally, there is a growing feeling among miners that a new price index should also include a spot price component. A review of the price formula became all the more necessary as recession deepened last year and spot prices tumbled well below the agreed benchmark prices set ahead of the crisis. A number of Chinese mills are believed to have reneged on the contracts at that time, refusing to accept shipments and instead buying far more cheaply in the spot market.
If indications are anything to go by, ore prices are slated to surge by almost 40-50% in 2010-11, reflecting a steep upturn in the fortunes of the global steel industry that was battling a severe recession just a year ago. If big mining companies like Vale of Brazil or the Anglo Australian Rio Tinto and BHP Billiton get their way, ore prices could be settled $90 a tonne or above, the record level at which the 2008-09 annual contracts were settled. This is sharply higher than the $60 agreed for 2009-10. Against this, the spot market prices for iron ore are
now close to $115 per tonne.
Back home, domestic prices too are up for annual review on April 1. India’s largest miner of iron ore, NMDC, currently fixes iron ore prices for long-term contracts based on the rate fixed by the Japanese Steel Mills (JSM), adjusted for the exchange rate. The Japanese who have virtually no ore reserves of their own have traditionaly been large buyers and thus taken the lead in price negotiations with global miners. However, in the last few years, with the onslaught of the Chinese steelmakers — who now produce over 500 million tonne or half of world’s steel output and buy huge quantities of ore from the market — the wisdom of setting JSM as benchmark price needs to be seriously examined.
Domestic steel majors such as Essar Steel, JSW Steel, Ispat Industries, RINL and host of others depend on NMDC for ore supplies. These are uncertain times for them and they could be staring at a similar quantum of increase in ore prices. With NMDC reducing its export commitments over the years, the combined offtake of domestic steelmakers now account for almost 85% of the company’s total production of 28.6 million tonne. Like its bigger international rivals, NMDC too, is planning to review its pricing formula and has appointed an independent UK-based metals and mining consultant, CRU, for the job. The state-owned company, in which the government is divesting 8.38% stake through a follow-on public offer, hopes to incorporate a mechanism to capture the business cycle of the domestic steel industry and make prices more relevant. If CRU’s recommendations get approved, NMDC may usher in a new price formula for its customers from April this year.
There is, perhaps, a strong case for delinking domestic prices from international trends. Among the options, could be the choice to stay with the existing formula, introduce a monthly or quarterly review option, indexation, or having certain spot and longterm price agreements. With NMDC’s production slated to go up to 50 million tonne by 2014-15, prices should also reflect the higher supply scenario instead of just mirroring the global situation.
While it is imperative to arrive at a suitable price formula that suits both domestic steelmakers and miners based on global pricing norms, it is equally important to minimise uncertainties in key raw material prices like iron ore and coal to get a better grip on cost of production.

FOREIGN investors may soon be able to set up Limited Liability Partnerships, or LLPs, in India, as the government is all set to allow foreign direct investment in this new form of business organisation.
Initially, FDI up to 49% may be allowed in LLPs in select sectors such as manufacturing, a DIPP official told ET.
This could help make this form of business organisation more popular. So far, only 914 LLPs have been registered in the country. “We are ready with a discussion paper on the FDI framework for LLP,” the official, who did not wish to be named, said. The current thinking within the government is to allow FDI in LLP selectively and cap it at 49% even in sectors where companies can have 100% foreign investment, he added.
LLPs are business entities that are a hybrid between companies and partnership firms. As the name suggests, partners’ liability is limited to the extent of their stake in the LLP.
Unlike private limited companies where number of shareholders is limited to 50, an LLP can have unlimited number of partners. Besides, LLPs are not burdened with cumbersome compliance such as meetings and maintenance of statutory records. The DIPP will soon call a joint meeting with other ministries, departments and regulators including the RBI to discuss the paper and finalise the foreign investment regime for LLPs.
“Any move to ensure that LLPs have a level playing field will help the structure takeoff,” said Aseem Chawla, partner, Amarchand & Mangaldas adding that it was important that regulators in various services industry recognised this structure.
However, Akash Gupt, executive director, PwC felt more was needed for this structure to take off. “While allowing FDI in LLPs there is also a need to address sector regulatory issues that prohibit these entities from carrying on a particular activity,” he added. LLPs, for instance, cannot bid for a road project as per guidelines of the National Highway Authority of India.
Currently, FDI is not permitted in partnerships firms, but is allowed in companies subject to sectoral caps. In a number of manufacturing sectors 100% FDI is allowed through the automatic route.
Sole proprietorship firms can also get non-resident investment on a non-repatriable basis. Many countries allow 100% foreign investment in LLPs though they may not be allowed to undertake certain sectoral activities. The official said the 49% cap on FDI will ensure that control in LLP rests in Indian hands.
RBI had written to the finance ministry and the DIPP that FDI should be allowed in all sectors for LLPs but capped at 49%. It had also favoured mandatory Foreign Investment Promotion Board clearance for any FDI in LLPs.
The government had notified the LLP Act on April 1, 2009. But the taxation of LLPs, which is akin to partnership firms, could be clarified only in the July budget 2009-10. The budget for 2010-11 proposes to exempt capital gains on account of transfer of assets from on conversion of a company into an LLP from tax if the total sales, turnover or gross receipts of the company does not exceed Rs 60 lakh in any three preceding years.

THE way to wealth lies not merely in earning more, but in ensuring that you make your money work as well. In their quest to get their money to work harder, investors scout for options that offer best returns. Those who have time on their side and are confident of their investment skills choose their own stocks. Others leave that to mutual funds. But those who do not want to invest on their own and yet want more customisation could opt for portfolio management services. However, it is possible to get the best of both — professional advice and customised service only if there is scale, ie investments in the range of Rs 10-25 lakh. With the Indian equity markets coming of age, there is a plethora of choices. Competition among service providers has resulted in PMS being segmented in terms of investment style. Here’s a look at some of them:
TRADITIONAL PMS
Here, the fund manager builds a portfolio by buying stocks on the basis of fundamental research. The ‘go-anywhere’ strategy gives the fund manager enough leeway to take the optimal route for increasing wealth. The portfolio built could be merely large-cap in nature or small-cap in nature or a mixture of both. However, as we move ahead, there are specialisations in the money management business. Let us see how the offerings work.
VALUE INVESTING
It is a philosophy founded and developed by Sir Benjamin Graham and followed by the likes of Warren Buffett. It involves buying stocks which quote at a discount to intrinsic value. It is generally long term in nature and stocks bought here have to be held for as long as 3-5 years. “Those who want to buy something worth Rs 100, at a price substantially less than Rs 100 should go for this style,” says IV Subramaniam, CIO, Quantum Advisors. There are service providers available in the market who strictly go with Grahamian value investing principles. One can also come across money managers giving a thought to special situations arising out of delisting, buyback of shares, restructuring and turnaround of businesses.
QUANTITATIVE INVESTING
In this method, the fund manager uses quantitative models which are based on company fundamentals, accounting and economic data to build a portfolio of stocks for you. Although fairly successful globally, this is a new concept offered in India. “Investors looking for consistent, stable returns from large-cap equities should use this approach,” says Radhika Gupta, founder and director, Forefront Capital, which offers quantitative PMS to its clients in India. Quantitative investing, however, works well only with large-cap stocks, and hence, those looking for multi-faceted returns should not go for this style of investing.
TECHNICAL PMS
Portfolio managers now adopt strategies based on technical parameters or arbitrage opportunities. Pro Tech PMS of Sharekhan is one such scheme that invests using technical analysis. The idea is to offer absolute returns to the investor, irrespective of the market going up or down. The product called Nifty Thrifty is an index-trading mathematical model and tries to capture the direction of the market and aims at giving absolute returns to investors.
MONEY MANAGEMENT
“When the market turns bearish, it goes through various phases namely those of euphoria, denial, fear, panic. Similarly, there is denial, overconfidence and greed when the market moves from bear to bull markets,” says Shrirang Joshi, MD, Maia Financial Services, which has recently started offering PMS services to clients, using this as a technique.
A point to note is a good understanding of behavioural aspects offers the investor or money manager good entry or exit points. However, there is a need to back this entry or exit with a good reasoning based on fundamental or technical analysis. Generally, service providers here club behavioural investing with the fundamental investing.
There are fund managers who look at statistical tools such as correlation between various markets and various asset classes before taking macro calls. Pair trading is also prominent when it comes to short-term trading ideas. “With the advent of new products such as interest rate futures and currency futures, we are approaching the dawn of new money management game in the near future,” says an investment strategist with a foreign bank.
CHOOSE YOUR MANAGER TYPE OF PMS
Fundamental & value investing
PROVIDER: Brokerage houses like Way2Wealth, Alchemy. Motilal Oswal, Parag Parikh, Angel Broking and several boutique firms
MINIMUM AMOUNT: Could vary between Rs 5 lakh-25 lakh
ADVANTAGES / DISADVANTAGES: The style of managing the portfolio is well-defined. Online access to portfolio.
FEES: Managers charge 1-2.5% as upfront fees. There is a performance-linked fee which could vary from 10-25% payable quarterly. Some take a profit share once they cross a hurdle rate of 10-15%
TRACKING MECHANISM: Monthly portfolio statements work as a good tracking tool. Transaction statements help you monitor brokerage costs. You can talk to your portfolio manager or relationship manager in case you need guidance
Technical, quantitative behavioural finance PROVIDER: Sharekhan, Forefront Capital, Maia Financial MINIMUM AMOUNT: Rs 5 lakh
ADVANTAGES / DISADVANTAGES: Relatively new product in India. Boutique firms offering these may not have a past track record FEES: In case of technical PMS, some firms do not charge an upfront fee. They take a 20% profit sharing on booked profits

CORPORATES nursing hopes of floating a bank may make a mental note that almost 15% shares of Catholic Syrian Bank (CSB) are about to change hands.
Bangkok-based NRI businessman Sura Chansrichawla, who controls around 24% of CSB shares, has lined up a string of non-resident investors to offload 14.55% equity of the bank.
Under the arrangement, Chansrichawla and his associates will sell a shade below 1% to each of the overseas investors, some of whom are based in Hong Kong and Singapore. The proposed transaction, which would involve physical transfer of non-demat shares, will lower Chansrichawla’s holding in the bank to a little below 10%.
“The deal is being structured in a way to conform to an earlier court ruling that any transfer of more than 1% CSB equity will require RBI’s approval... The stock will be sold at Rs 375-400 a share,” said a source familiar with the development. For other private banks, RBI approval is needed if 5% or more shares are bought by a single entity or a group of entities acting in concert. Under the circumstances, neither Mr Chansrichawla nor CSB will have to approach the regulator.
Interestingly, it’s learnt that a Delhi-based financial services group which has serious ambitions to enter banking, has been in touch with many of the buyers for a possible deal at a later point. “These individuals or offshore entities can be bought out if the concerned corporate receives the RBI approval,” said the source.
When contacted by ET, Sura Chansrichawla as well CSB managing director VP Iswardas declined to comment.
The Thrissur-headquartered CSB hit the headlines last year after the Catholic Church in Kerala stalled its merger with another southern bank, Federal. CSB, with its Rs 8,000-crore balancesheet, has 360 branches, of which 80% are in rural and semi-urban areas. Chansrichawla, who earlier sold around 4% stake to Federal and was looking for an exit, had backed the merger proposal. Discussions on the present transactions began shortly after the CSB-Federal deal fell through.
For Chansrichawla, this would be a more profitable deal than Federal which was willing to pay less than Rs 300 crore. The NRI businessman had also given a commitment to RBI that he would lower his group’s stake in CSB to 10% by March 31, 2010.
The matter is expected to come up before the CSB board when it meets later this month. Since the shares are in physical form, a change in ownership has to be ratified by a board committee. There would be other procedures like opening bank accounts for new buyers and getting the deal registered.
Besides small shareholders belonging to the Kerala Catholic community, a few foreign funds hold around 4% each in the unlisted bank and about 10% is controlled by a local stockbroker through several individual shareholders.
It’s unclear how the transaction will go down among the local community, primarily comprising Syrian Catholics. There were reports that last year, they had approached the Thrissur Achbishop to form an action group under the banner of CSB Protection Committee and made him its chairman. Efforts were on to raise funds from local and NRI members of the community to buy stake in the bank. However, it is not known how much the community has mobilised till now.

THE failure on the part of private equity (PE) firms and promoters to reach a consensus on valuations has led to the signing of more ratchet private equity deals which have provisions built in to provide greater protection to investors.
After the slowdown of 2008-09, plain vanilla private equity investments and debt-equity deals are gradually making way for ‘safety-net structures’ that protect investors from fluctuating returns and underperformance of portfolio companies. One such structure in vogue now is ratchet investments.
A ratchet is a contractual agreement between a PE fund and the promoter of a company that in the event of a reduction in targeted growth (or in the case of fresh equity issue) or a decline in performance, the PE fund could increase its stake in the company without infusing fresh capital. In other words, a ratchet gives PE funds an option to increase its holding (without paying for the additional stake) if the company fails to achieve pre-set targets.
The equity allocation may vary, depending on the performance of the company and the PE fund’s expected rate of return. According to industry officials, the ceiling (the level up to which a PE fund can raise its stake in case of underperformance) could be in the 20-60% range from the floor-level (stake diluted at the first instance). There have been instances where private equity investors have scaled their investments up to 75% to gain more management control, these officials said.
“Ratchet structures are usually done by early-stage investors. These structures give them an adequate protection in times of a bad business environment. We have seen several ratchet deals happening in unlisted companies where exit options are limited,” said CG Srividya, partner of Grant Thornton. Ratchet deals start cracking when markets (and valuations) are trading at higher levels. It is in these times when promoters and PE investors fail to reach a mid-path on valuations. A large number of ratchet deals were recorded in 2006 and 2007. “PE firms are not left with many options when promoters are insistent on valuations that are 4-6 times the net revenue of a company. We do ratchets in companies that will be able to hold ground in bad times,” said a private equity fund manager, adding, “Even if a company underperforms for a brief while, we’ll be able to increase our holdings and still be invested in a company that has good growth prospects.”
Ironically, promoters of companies which had agreed to execute ratchet deals in 2006 and 2007 were not able to meet performance targets in 2008. This led to several PE funds increasing their stakes in companies where they have a ratchet contract.
“Ratchet structures are common in highgrowth economies where growth expectations are high. The pricing of the deal is done by considering the future growth of a company,” said Pankaj Dhandharia, partner of Ernst & Young.
“Apart from underperformance, ratchet deals come handy for PE funds when a company is going in for a fresh issue of shares (for example, a bonus issue),” Mr Dhandharia added. In the event of a fresh issue of shares, the overall stakeholding of a PE fund will be protected (from dilution). The fund will be allotted fresh shares (to match earlier stakeholding) free of cost or at a discounted price.

THE Sebi fiat mandating institutional investors to pay 100% of the application money upfront for public issues from May 1 (against 10%), is unlikely to have a major impact on the float money that bankers to the issue receive. Also, with the market regulator looking to cut short the time frame for issues from the current 15-21 to around seven days, banks will have fewer days to use the float money.
Some of the foreign and public sector banks, that have large institutional investor accounts, will benefit marginally, say bankers. Currently, only high net worth individuals and retail investors bring in 100% of the money upfront.
Some of the main bankers to capital market issues are SBI, Citi, Kotak Mahindra Bank, HDFC Bank, ICICI Bank, HSBC and Axis Bank.
However, the perception is that with the ASBA (application supported by blocked amount) route eventully to be opened to FIIs, investors subscribing to a public issue will continue to earn interest on the application money as it remains in their accounts. This is not the case with other modes of payment. ASBA is an application for subscribing to an issue, containing an authorisation to block the application money in a bank account.
Foreign banks like Citi, HSBC and StanChart have most of the foreign institutional investors’ accounts while public sector banks have the accounts of the PSU insurance companies like LIC. The accounts of the Indian mutual funds and insurances are distributed between the private sector banks and foreign banks. “The net impact would be very marginal. The amount of float which flows in for the banks even now is insignificant. The float was larger from the retail side,” says Deepak Gupta, ED, Kotak Mahindra Bank.
Banks have to maintain 5.75% of their savings and term deposits as CRR and 25% in statutory liquidity ratio (SLR) with the RBI. “There is also a lag impact on banks to maintain the CRR and SLR. Banks sometimes have to borrow money to maintain the CRR and SLR as it had to be maintained a week after the money flows out,” Mr Gupta told ET.
However, bankers feel most institutional investors will henceforth come in at the fag end of the issue. But they are unclear as to how the new guidelines will impact anchor investors who currently have to bring in around 25% of the application money, a day ahead of the issue, with the balance amount to be paid on allotment.
“Most QIB interest will be back-ended. However, investors will henceforth indicate their real interest. This will improve the overall quality of demand,” says Debasish Purohit, director & head, ECM, BoA Merrill Lynch.
Ravi Kapoor, MD and head of South Asia-capital markets origination, Citi, also agrees that the demand will be more back-ended and investors will bid at realistic levels. He adds, “The level of over-subscription will come down. It’s not the question of float money. Sebi has tried to create a level-playing field for all investors. Further, as a next logical step, Sebi will also look to reduce the timelines for listings so that investor money is not held up.” He adds, “Anchor investors will also have to bring in upfront money. Valuations will reduce to reasonable levels and oversubscription will be moderate. Also, the percentage of people using ASBA will be high as institutional investors are more likely to use it than retail investors.”
Though ASBA is an investor-friendly move, it is yet to gain traction among small investors. Sebi introduced ASBA following complaints of non-repayment of application money or delayed refund by companies. In a significantly oversubscribed issue like the February 2008 Reliance Power issue, which received bids for over 69 times the targeted Rs 11,790 crore, bankers had an opportunity to make huge money out of float funds. However, in more recent times the response to public offerings has been more muted, giving banks lesser opportunity to play with the float.