27th October - The Economic Times

Shuchi Aggarwal
Shikha Yadav
Shivendra Pratap Singh
Section E


Small Investors may get bigger share in PSU floats,Pg.1
The department of disinvestment plans to pitch for a higher quota for retail investors in forthcoming share sales at state-run companies, as it looks to use the buzz generated by the Coal India IPO to take equity culture to Indian households. Existing norms stipulate that at least 35% of the shares offered in a book-built share sale, where investors are asked to bid in a pre-decided price band, must be reserved for retail investors.
The retail portion of the Coal India offer was subscribed 2.31 times, providing a fitting backdrop for an increase in the quota for retail investors.
senior finance ministry official said “With more purchasing power in the hands of retail investors, we expect good response from them and The idea is to share the wealth of public sector companies with the public” The move is aimed at sharing public wealth with small investors, spreading equity culture to a wider population, and broad-basing the market.
In 2009-10, public offers from PSUs, including that of power producer NTPC, received lukewarm response from retail investors. The retail portion of the NTPC offer was subscribed just 0.16%. The offers from REC and NMDC also met the same fate, with their retail portions failing to attract enough investors. Market analysts attribute this to aggressive pricing. All these issues received an overwhelming response after the government cut the offer price.
Given the budgeted divestment target of Rs 40,000 crore, state-owned companies will be the biggest issuers in the current financial year. Some of the major companies expected to hit the market this year are ONGC , IOC and Steel Authority of India.

IFRS norms may be diluted before rollout,pg.1
the government plans to dilute some key provisions relating to foreign exchange differences and overseas borrowings which will make global investors suspect Indian accounting, say three people closely associated with the development. In the case of accounting for foreign exchange differences that rise because of currency derivatives taken by firms, the government is looking at an option where companies need not provide for any loss in the profit and loss statement but rather just carry forward the value as at the end of March 2011, according to a ministry of corporate affairs official, who declined to be named as he is not authorized to talk with the media.
The National Advisory Committee on Accounting Standards (NACAS), an advisory body for the corporate affairs ministry, is in favor of allowing companies not to provide for mark-to-market (MTM) losses on their foreign currency convertible bonds (FCCBs), says a member of the advisory board.

MTM is an accounting principle where the value of the contract is marked at current exchange rate for currency derivatives and current bond price for FCCBs. both dilutions will be major departures from what the International Financial Reporting Standards (IFRS) prescribe. It has huge upside for India Inc in the short term by helping it to avoid reporting such MTM losses prescribed by IFRS. But it may work to its detriment in the long term by making companies unattractive to global investors.
When companies first adopt IFRS, the standards lay out a procedure on how to treat the foreign exchange differences. It gives two options — the first is to reduce it from the profits and the second is to revalue all the assets in the balance sheet and adjust the loss arising from exchange differences with the reserve created from such revaluation. Both will have a negative impact — one will reduce the profits and the other would shrink the balance sheet. So, companies have sought dilution of the provision.
The whole issue of accounting for changes in foreign exchange rates came to the forefront during global financial crisis, after Lehman Brothers collapse.

Many exporters and foreign loan holders took cross-currency derivatives to hedge their exposure not just to protect them from currency movements but also to make profit from such bets. They placed their bet on so-called safe currencies like Japanese yen or Swiss franc. But when the crisis was at the peak, both the yen and the franc moved in ways not seen for years. Japanese yen fell below 100 mark against the dollar for the first time. The extent of losses are not known, but the Reserve Bank of India in its submission to the Orissa High Court stated the mark-to-market losses for customers who bought these derivative products were estimated at Rs 37,719 crore in December 2008. Further, it said 22 banks that sold complex derivative products lost Rs 756 crore as of December 2008.
MARKET

Shrinking Bank revenue signals growth worries,Pg.19
shrinking revenue at US banks, led by Goldman Sachs Group and Citigroup, may continue to fall as the industry heads into what could be its slowest period of growth since the Great Depression .

After the six largest US banks posted record revenue in 2009, combined net revenue fell by an average of 8% in the third quarter from a year earlier and 16.3% over the last two quarters, according to data compiled by Bloomberg.

Revenue so far this year is down by 4.1%, driven by declines in everything from trading at Goldman Sachs to home lending at Bank of America. New laws restricting account and credit-card fees, as well as derivatives and capital rules, are also squeezing lenders.

Next year will kick off a decade that will bring the “worst revenue growth” for US banks in 80 years, according to Mike Mayo, an analyst at Credit Agricole Securities in New York. Net revenue at US commercial lenders has expanded at a slower pace in each of the last three decades , falling to 6% in the last decade from 12% in the 1970s, says Federal Deposit Insurance data.

“Revenues aren’t just weak for this quarter, or even for this upcoming year, but for the entire upcoming decade,” said Mayo, a former Federal Reserve analyst, who has more than 20 years of industry experience . “The speed limit’s been lowered for how fast banks can drive earnings.”

The trend over the last two quarters is hitting almost every line of income statements and is spread across the sector, affecting investment banks, consumer banks and commercial lenders. It’s eating away at profits, depressing stock prices and threatening bonuses and new hiring.

Economy

Warehousing Act comes into force, receipts now negotiable,pg.27
The Prime Minister’s Economic Advisory Council has recommended cross-representation of the Forward Markets Commission (FMC), the Bureau of Indian Standards (BIS) and the newly formed Warehousing Development and Regulatory Authority (WDRA) on each others’ boards.
This is for better coordination among the regulators involved in the entire chain of warehousing and warehousing receipts, its tradability and delivery. And, to address disputes arising among end-users involved in the chain.
The receipt representing goods stored in warehouses will be traded on exchanges regulated by FMC. These receipts, to be eligible for trading, should represent universally accepted quality parameters of the goods to be delivered on expiry of receipts. These parameters of the processes and infrastructure involved in supply and storage of goods will be worked out by BIS.
So, having representation on each others’ boards would facilitate development of warehouse receipts and their tradability, since WDRA could draw upon the expertise of FMC and BIS in setting up quality parameters for goods and specification of receipt for trading. Warehouses play an important role in commodities futures, as most trades are settled with delivery.That is, if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. A warehousing system and warehouse receipts act as the chain, connecting farmers with the futures market and credit financing.
A warehouse receipt is a document that provides proof of ownership of commodities (e.g., rice or wheat or bars of copper) e stored in a warehouse, vault or depository for safekeeping. Negotiable warehouse receipts allow transfer of ownership of that commodity without having to deliver the physical commodity. These receipts are also used as collateral for loans for bank financing. It may also show transfer of ownership for immediate delivery or for delivery at a future dateRather than delivering the actual commodity, negotiable warehouse receipts are used to settle expiring futures’ contracts. Their usage for futures’ trading thus helps in curbing wastage, especially in agricultural commodities, since the goods are not moved.
Commodities

Iron ore prices may soften in 3-6 weeks,Pg.26
The government is likely to finally allow iron ore futures trading by this month-end, chairman of the Forward Markets Commission, the commodity derivatives market regulator in India, said on Tuesday. The iron ore contract proposal was made by the Indian Commodity Exchange (ICEX), which is part-owned by state-run MMTC Ltd (MMTC.BO), which is the biggest Indian trader of the commodity.
Iron ore contracts in India, the world's third-largest producer of the ore, will help small exporters to hedge risk against fluctuating prices, traders and analysts said.
On sugar futures launch, Khatua said the launch of November expiry contract is not likely.
"Most likely December expiry contract will be the first one to be launched."
A bon on sugar futures trade by the government had lapsed on Sept. 30, after the world's biggest consumer expected sharp recovery in the local output.
However, the regulator has been studying proposals from the exchanges before giving the final go-ahead.
"We may decide on a few changes in the contract specification to improve the contract," said Khatua, adding, he will meet stakeholders in the sugar industry to improve the contract.


The Political Theatre

Australia pays up for CWG damages,Pg.2

The Australian mission at Commonwealth Games has paid Rs 10,000 as damages for the vandalism of some members of its squad who threw down a washing machine from the seventh floor of a Games Village apartment.

The alcohol-fuelled vandalism, first reported by TOI, could have taken a fatal turn if the machine had struck someone and led to condemnation of the behaviour of Aussie athletes concerned though no formal complaint was lodged. The amount paid covers the cost of the washing machine. No fine was imposed.

Australian squad were involved in at least two other incidents of overly boisterous behaviour in the dining area and on one occasion were led away by their managers.

The incidents were brushed aside as CWG organisers decided not to lodge a complaint while Aussie officials denied the incident (of the washing machine being thrown) had anything to do with the Test side losing to India in cricket.