MUMBAI: The RBI has increased cash reserve ratio by 75 bps to 5.75%, whereas key interest rates were unchanged in its third quarter review of the Annual Monetary Policy. CRR hike would suck out Rs 36,000 crore liquidity from the system. The hike would happen in two stages, the first stage of hike of 50 bps will be effective from February 13 and the next 25 bps from February 27. RBI kept the reverse repo rate unchanged at 3.25% and repo rate at 4.75%.
RBI projected the GDP growth for financial year 2009-10 at 7.5% from 6% last year. It also said that the inflation would be around 8.5% in March.
This policy is the first major move to mark the reversal of the easy money policy adopted since October 2008. A CRR hike has not come as a shocker for markets as the same has largely been factored into expectations.
Taking a cue from RBI's monetary policy stance, banks might not hike their auto, home and education loans in the near term.
Increases in CRR could push bond yields up, and weigh on shares of banks as well as sectors such as auto and property on concerns loan demand may slow.
The central bank absorbs excess funds from the banking system at the reverse repo rate, which is at 3.25 percent, and lends money to banks at the repo rate, which is 4.75 percent.
"With a stronger recovery in India, the risk of food price inflation causing generalized inflation cannot be ignored," the RBI said in a report on Thursday.
After cooling off for three consecutive weeks, food inflation was back on an upward trail. It rose to 17% on January 16 - from 16.81% a week earlier - on the back of rebounding prices of eggs and vegetables.
Food inflation had come down to 16.81% in the preceding week (January 9) after spotting the 20% mark in December, the highest in a decade.
High food prices have led to firming up of overall inflation too, which rose to 7.31% in December from 4.78% in November. Overall inflation was at sub-zero levels for 13 weeks till September last year.
Industrial output grew 11.7 per cent in November from a year earlier, as stimulus measures since October 2008 to overcome the global credit crunch supported domestic demand.
As expected this step of the Central Bank could be observed in the line of an exit from an accommodative monetary policy in its quarterly credit policy review. Analysts taking cue from last policy review had been expecting the RBI to start exiting its year-old accomodative monetary stance starting in early 2010, as signs emerge of a pick up in growth and inflationary pressures rise.
Friday, January 29, 2010
Banks may tweak sub-PLR if RBI raises cash reserve ratio
Banks are exploring the option of increasing the sub-prime lending rate, mainly offered to companies, while keeping the benchmark prime lending rate (BPLR) untouched.
The move comes amid growing expectations that the Reserve Bank of India (RBI) will increase the cash reserve ratio (CRR) in the third quarter review of the monetary policy in January-end.
A 50-basis-point (bps) hike in the CRR will suck out about Rs 20,000 crore from the system. However, banks are not likely to face much pressure on the liquidity front as the system is flush with around Rs 1 lakh crore surplus liquidity. Banks do not get any return on cash kept with RBI. This is currently 5 per cent of the banks’ net demand and time liabilities.
“Banks will not do anything in the fourth quarter on the interest rate front. There may be some tweaking in the sub-PLR range if the central bank decides to hike the CRR. The extent of increase in sub-PLR loans will depend on how much RBI increases the CRR,” SA Bhat, chairman and managing director of Indian Overseas Bank, told Business Standard.
Around 70 per cent bank lending happens below the BPLR, which is 11-13 per cent.
The Chennai-based bank expects to meet its targeted net interest margin (NIM) for 2009-10, projected at 2.8 per cent. Currently, the bank’s margin is 2.74 per cent.
Bankers said their NIMs might not come under pressure on a sequential basis as they were able to re-price their high-cost deposits. A faster-than-expected rise in profit was making a strong case for the central bank to suck out liquidity, analysts said. However, some bankers say that since inflation is due to supply-side bottlenecks, hiking the CRR may not solve the problem. “Raising the CRR may not bring down inflation. If RBI hikes the ration, banks will not earn any interest. To compensate, we may have to hike lending rates. But that may affect credit offtake, which is already very low,” said A C Pereira, chairman and managing director of Bank of Maharashtra. Inflation based on the wholesale price index shot up to 4.78 per cent in November as compared with 1.3 per cent in October, mainly due to a surge in food prices and a lower base last year. Rise in food prices was on the back of the worst monsoon since 1972, which was followed by floods affecting the summer crops.
According to a research report of Citigroup Global Markets, headline inflation could touch 8 per cent by March, much above the central bank’s projected rate of 6.5 per cent. “If the current sequential uptrend is maintained, the WPI appears likely to cross 8 per cent by March, with primary products and fuel prices being the key risk factors.
However, we maintain our call of 125 bps tightening in 2010 for now, given that authorities have been stressing the importance of focusing more on asset price inflation rather commodity-induced inflation,” the Citigroup report said. The government, however, feels that there is no need for an emergency action even after this week’s sudden spurt in inflation. “The fact that food inflation was high and would reflect in the WPI was known. So, this is not something that has taken us by surprise. We need to watch further and see if this is purely due to the base effect or whether this trend will continue,” Finance Secretary Ashok Chawla told reporters in New Delhi.
The move comes amid growing expectations that the Reserve Bank of India (RBI) will increase the cash reserve ratio (CRR) in the third quarter review of the monetary policy in January-end.
A 50-basis-point (bps) hike in the CRR will suck out about Rs 20,000 crore from the system. However, banks are not likely to face much pressure on the liquidity front as the system is flush with around Rs 1 lakh crore surplus liquidity. Banks do not get any return on cash kept with RBI. This is currently 5 per cent of the banks’ net demand and time liabilities.
“Banks will not do anything in the fourth quarter on the interest rate front. There may be some tweaking in the sub-PLR range if the central bank decides to hike the CRR. The extent of increase in sub-PLR loans will depend on how much RBI increases the CRR,” SA Bhat, chairman and managing director of Indian Overseas Bank, told Business Standard.
Around 70 per cent bank lending happens below the BPLR, which is 11-13 per cent.
The Chennai-based bank expects to meet its targeted net interest margin (NIM) for 2009-10, projected at 2.8 per cent. Currently, the bank’s margin is 2.74 per cent.
Bankers said their NIMs might not come under pressure on a sequential basis as they were able to re-price their high-cost deposits. A faster-than-expected rise in profit was making a strong case for the central bank to suck out liquidity, analysts said. However, some bankers say that since inflation is due to supply-side bottlenecks, hiking the CRR may not solve the problem. “Raising the CRR may not bring down inflation. If RBI hikes the ration, banks will not earn any interest. To compensate, we may have to hike lending rates. But that may affect credit offtake, which is already very low,” said A C Pereira, chairman and managing director of Bank of Maharashtra. Inflation based on the wholesale price index shot up to 4.78 per cent in November as compared with 1.3 per cent in October, mainly due to a surge in food prices and a lower base last year. Rise in food prices was on the back of the worst monsoon since 1972, which was followed by floods affecting the summer crops.
According to a research report of Citigroup Global Markets, headline inflation could touch 8 per cent by March, much above the central bank’s projected rate of 6.5 per cent. “If the current sequential uptrend is maintained, the WPI appears likely to cross 8 per cent by March, with primary products and fuel prices being the key risk factors.
However, we maintain our call of 125 bps tightening in 2010 for now, given that authorities have been stressing the importance of focusing more on asset price inflation rather commodity-induced inflation,” the Citigroup report said. The government, however, feels that there is no need for an emergency action even after this week’s sudden spurt in inflation. “The fact that food inflation was high and would reflect in the WPI was known. So, this is not something that has taken us by surprise. We need to watch further and see if this is purely due to the base effect or whether this trend will continue,” Finance Secretary Ashok Chawla told reporters in New Delhi.
Thursday, January 14, 2010
Makar Sankranti - January 14
Makar Sankranti is one of the most auspicious occasions for the Hindus, and is celebrated in almost all parts of the country in myriad cultural forms, with great devotion, fervour & gaiety. It is a harvest festival. Makar Sankranti is perhaps the only Indian festival whose date always falls on the same day every year i.e. the 14th of January.
Makar Sankranti is the day when the glorious Sun-God begins its ascendancy and entry into the Northern Hemisphere and thus it signifies an event wherein the Sun-God seems to remind their children that 'Tamaso Ma Jyotir Gamaya', may you go higher & higher, to more & more Light and never to Darkness.
To Hindus, the Sun stands for knowledge, spiritual light and wisdom. Makar Sankranti signifies that we should turn away from the darkness of delusion in which we live, and begin to enjoy a new life with bright light within us to shine brighter and brighter. We should gradually begin to grow in purity, wisdom, and knowledge, even as the Sun does from the Day of Makar Sankranti.
The festival of Makar Sankranti is highly regarded by the Hindus from North to down South. The day is known by various names and a variety of traditions are witnessed as one explores the festival in different states.
Traditions
Traditionally, this period is considered an auspicious time and the veteran Bhishma of Mahabharata chose to die during this period. Bhishma fell to the arrows of Arjuna. With his boon to choose the time of his death, he waited on a bed of arrows to depart from this world only during this period. It is believed that those who die in this period have no rebirth.
For the people in the Indo Gangetic plain, the day begins with taking dips in the Ganges and offering water to the Sun-God. The dip is said to purify the self and bestow ‘punya’. Special Puja is offered as a thanksgiving for good harvest.
Til and rice are two important ingredients of this festival. In the rice-eating belt of Bihar and eastern Uttar Pradesh, people have a special rice-centric meal on this day.
In Makar Sankranti, women prepare laddus or other sweets of Til & Gur and offer them to friends & relatives. It symbolizes a ‘Well-being Prayer for all’ gets manifested in action & deeds.
Celebrations
Makar Sankranti is observed and celebrated throughout India by all communities but with slight variations in the festivities.
Uttar Pradesh: In Uttar Pradesh, Sankranti is called ‘Khichiri’. It is an important bathing date during the famous Magh Mela and Kumbh Mela at Sangam (Prayag) in Allahabad.
West Bengal: It is known as Gangasagar Mela in Bengal and on the particular day people come from all over India for a ceremonial cleansing in the river Hooghly, near Kolkata.
Tamil Nadu:
In Tamil Nadu, Makar Sankranti is known by the name of ‘Pongal’. It is very popular particularly amongst farmers. Rice and pulses cooked together in ghee and milk is offered to the family deity after the ritual worship.
Andhra Pradesh:
In Andhra Pradesh, it is celebrated as a three-day harvest festival, known as Sankranthi.
Maharashtra:
In Maharashtra, on the Sankranti day, people exchange multi-colored tilguds made from til (sesame seeds) and sugar and til-laddus made from til and jaggery.
Assam:
Bhogali Bihu is celebrated on the day in Assam.
Punjab:
In Punjab where December and January are the coldest months of the year, huge bonfires are lit on the eve of Makar Sankranti and which is celebrated as "Lohri".
In Central India, it is known as Sankranti.
In Gujarat and Rajasthan, it is known as Uttarayan and is noted for the kite flying event.
Tuesday, January 12, 2010
November industrial output up 11.7 y/y - govt
NEW DELHI (Reuters) - India's industrial output rose at a faster-than-expected 11.7 percent in November from a year earlier, helped by stimulus measures that boosted domestic demand, data showed on Tuesday.
The median forecast in a Reuters poll was for an annual rise of 10 percent.
Manufacturing production rose 12.7 percent in November from a rise of 2.7 percent a year earlier.
The final figure for October's annual industrial growth rate was unchanged at 10.3 percent.
Industrial output rose 2.6 percent in the 2008/09 fiscal year (April-March), slower than 8.5 percent in 2007/08 as the global economic downturn hit Asia's third-largest economy.
Thursday, January 07, 2010
Iron Ore Reaches High as Goldman Sees ‘Panic Buying’
The cash price of iron ore delivered to China, the world’s biggest buyer, rose to the highest in more than a year amid what Goldman Sachs JBWere Pty said was “panic buying” by steel mills.
The cost of 62 percent iron-content ore delivered to Tianjin port increased 2.9 percent to $124.80 a metric ton yesterday, according to The Steel Index. The so-called spot price has surged 24 percent in four weeks and has more than doubled from its 2009 low on March 27.
Chinese mills have stepped up iron ore purchases to meet rising steel demand fueled by the nation’s stimulus spending. The gains boost expectations for a rise in annual contract prices, which would raise profits for Vale SA, Rio Tinto Group and BHP Billiton Ltd., the three biggest exporters.
“Spot price strength has been exacerbated by panic buying by Chinese mills increasingly concerned about availability at a time of reduced spot cargoes on offer from Australia due to contractual commitments,” Goldman Sachs JBWere analysts Malcolm Southwood and Paul Gray said in a report dated yesterday.
Fortescue Metals Group Ltd., Australia’s third-biggest exporter, advanced as much as 7.1 percent to A$5.57 on the Australian stock exchange, its highest since September 2008. It traded at A$5.24 at 2:42 p.m. Sydney time. Atlas Iron Ltd. rose 3.8 percent to A$2.21.
Demand has been spurred by buying ahead of the Lunar New Year holiday in China at the same time as non-Chinese customers boost contract purchases, Goldman’s Southwood and Gray said. The Chinese holiday starts Feb. 14 and will last for a week.
Annual Talks
“The sharp gain in prices is largely justifiable by stocking demand from Chinese traders ahead of the Chinese New Year,” Li Wei, an analyst at Shanghai-based commodities researcher CBI China Co. said today. “Yet it also has speculative elements as we’re ahead of the annual talks.”
Iron-ore suppliers hold annual talks with steelmakers to fix contract prices for the 12 months from April 1, the start of the Japanese financial year. The four-decade-old pricing system was fractured last year after Chinese mills failed to reach agreement with the three largest suppliers, boosting demand for cargoes settled on the cash market.
China’s 72 major steelmakers will probably post a 41 percent decline in their aggregate profit for 2009, the China Iron and Steel Association said Dec. 23. Steelmakers globally will suffer more losses should ore prices gain in 2010, Baoshan Iron & Steel Co., China’s largest steelmaker, said last month.
Price Forecasts
Producers last year agreed to a 33 percent cut in contract prices as the worst global recession since World War II cut demand. Macquarie Group Ltd. analysts forecast contract prices may jump 30 percent from last year’s price of about $60 a ton, according to a Dec. 15 report.
Goldman has raised its forecast for the average 2010 cash iron ore price, which includes freight costs, by 20 percent to $111 a ton, according to yesterday’s report. Its forecast for a 20 percent gain in this year’s contract price remains unchanged though the “risk remains firmly on the upside,” the analysts wrote in the report.
India, the world’s third-biggest exporter, last month introduced a levy on shipments to help secure additional supplies for its own consumption to help fuel economic growth, boosting prices. Australia is the world’s biggest exporter of iron ore.
The cost of 62 percent iron-content ore delivered to Tianjin port increased 2.9 percent to $124.80 a metric ton yesterday, according to The Steel Index. The so-called spot price has surged 24 percent in four weeks and has more than doubled from its 2009 low on March 27.
Chinese mills have stepped up iron ore purchases to meet rising steel demand fueled by the nation’s stimulus spending. The gains boost expectations for a rise in annual contract prices, which would raise profits for Vale SA, Rio Tinto Group and BHP Billiton Ltd., the three biggest exporters.
“Spot price strength has been exacerbated by panic buying by Chinese mills increasingly concerned about availability at a time of reduced spot cargoes on offer from Australia due to contractual commitments,” Goldman Sachs JBWere analysts Malcolm Southwood and Paul Gray said in a report dated yesterday.
Fortescue Metals Group Ltd., Australia’s third-biggest exporter, advanced as much as 7.1 percent to A$5.57 on the Australian stock exchange, its highest since September 2008. It traded at A$5.24 at 2:42 p.m. Sydney time. Atlas Iron Ltd. rose 3.8 percent to A$2.21.
Demand has been spurred by buying ahead of the Lunar New Year holiday in China at the same time as non-Chinese customers boost contract purchases, Goldman’s Southwood and Gray said. The Chinese holiday starts Feb. 14 and will last for a week.
Annual Talks
“The sharp gain in prices is largely justifiable by stocking demand from Chinese traders ahead of the Chinese New Year,” Li Wei, an analyst at Shanghai-based commodities researcher CBI China Co. said today. “Yet it also has speculative elements as we’re ahead of the annual talks.”
Iron-ore suppliers hold annual talks with steelmakers to fix contract prices for the 12 months from April 1, the start of the Japanese financial year. The four-decade-old pricing system was fractured last year after Chinese mills failed to reach agreement with the three largest suppliers, boosting demand for cargoes settled on the cash market.
China’s 72 major steelmakers will probably post a 41 percent decline in their aggregate profit for 2009, the China Iron and Steel Association said Dec. 23. Steelmakers globally will suffer more losses should ore prices gain in 2010, Baoshan Iron & Steel Co., China’s largest steelmaker, said last month.
Price Forecasts
Producers last year agreed to a 33 percent cut in contract prices as the worst global recession since World War II cut demand. Macquarie Group Ltd. analysts forecast contract prices may jump 30 percent from last year’s price of about $60 a ton, according to a Dec. 15 report.
Goldman has raised its forecast for the average 2010 cash iron ore price, which includes freight costs, by 20 percent to $111 a ton, according to yesterday’s report. Its forecast for a 20 percent gain in this year’s contract price remains unchanged though the “risk remains firmly on the upside,” the analysts wrote in the report.
India, the world’s third-biggest exporter, last month introduced a levy on shipments to help secure additional supplies for its own consumption to help fuel economic growth, boosting prices. Australia is the world’s biggest exporter of iron ore.
Monday, January 04, 2010
Indian Factory Output Rises Most in Seven Months
Jan. 4 (Bloomberg) -- India’s manufacturing output rose the most in seven months in December as exports rebounded and government stimulus stoked domestic demand for consumer goods.
HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index stood at 55.6 last month compared with 53 in November, according to a report released today. That was the ninth monthly reading above 50, which indicates a gain in factory production.
Faster economic growth may enable Indian policy makers to start reversing emergency stimulus measures taken last year to prop up growth in Asia’s third-biggest economy. China’s manufacturing expanded at the fastest pace in more than five years in December, a report showed today, as Asian economies recover from the worst global recession since World War II.
“Concerns that growth in India’s manufacturing sector was taking a decisive turn for the worse should be allayed by this impressive release,” said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings in Singapore. “External demand is also playing an increasingly important role in driving output gains.”
Recent economic data indicate the recovery is gaining traction. Exports rose 18.2 percent in November to $13.2 billion, the first increase in 14 months, and industrial output growth accelerated to 10.3 percent in October.
Economic Stimulus
Prime Minister Manmohan Singh’s government and the central bank injected fiscal and monetary stimulus of more than 12 percent of gross domestic product between September 2008 and April 2009. That helped the economy grow 7.9 percent in the three months to Sept. 30, the fastest pace in more than a year.
India may grow as much as 8 percent in the year ending March 31, Finance Minister Pranab Mukherjee said on Dec. 23.
The prospect of faster economic expansion helped the Sensitive Index of stocks gain 81 percent in 2009, the biggest annual increase in 18 years. The Sensex rose 0.4 percent to 17,531.33 at 10.56 a.m. in Mumbai.
Record-low interest rates and tax cuts are reviving demand for cars made by Maruti Suzuki India Ltd. and Hyundai Motor Co.
“December data pointed to a substantial increase in new business received by Indian manufacturers,” Prior-Wandesforde said. The growth was driven by better economic conditions, business investments and promotional activities. “Demand from both domestic and foreign sources rose since November, although the home market remained the main driver of total new business expansion,” he said in the report.
HSBC Holdings Plc and Markit Economics’ Purchasing Managers’ Index stood at 55.6 last month compared with 53 in November, according to a report released today. That was the ninth monthly reading above 50, which indicates a gain in factory production.
Faster economic growth may enable Indian policy makers to start reversing emergency stimulus measures taken last year to prop up growth in Asia’s third-biggest economy. China’s manufacturing expanded at the fastest pace in more than five years in December, a report showed today, as Asian economies recover from the worst global recession since World War II.
“Concerns that growth in India’s manufacturing sector was taking a decisive turn for the worse should be allayed by this impressive release,” said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings in Singapore. “External demand is also playing an increasingly important role in driving output gains.”
Recent economic data indicate the recovery is gaining traction. Exports rose 18.2 percent in November to $13.2 billion, the first increase in 14 months, and industrial output growth accelerated to 10.3 percent in October.
Economic Stimulus
Prime Minister Manmohan Singh’s government and the central bank injected fiscal and monetary stimulus of more than 12 percent of gross domestic product between September 2008 and April 2009. That helped the economy grow 7.9 percent in the three months to Sept. 30, the fastest pace in more than a year.
India may grow as much as 8 percent in the year ending March 31, Finance Minister Pranab Mukherjee said on Dec. 23.
The prospect of faster economic expansion helped the Sensitive Index of stocks gain 81 percent in 2009, the biggest annual increase in 18 years. The Sensex rose 0.4 percent to 17,531.33 at 10.56 a.m. in Mumbai.
Record-low interest rates and tax cuts are reviving demand for cars made by Maruti Suzuki India Ltd. and Hyundai Motor Co.
“December data pointed to a substantial increase in new business received by Indian manufacturers,” Prior-Wandesforde said. The growth was driven by better economic conditions, business investments and promotional activities. “Demand from both domestic and foreign sources rose since November, although the home market remained the main driver of total new business expansion,” he said in the report.
Reliance Industries Raises $576 Million in Share Sale
Jan. 4 (Bloomberg) -- Reliance Industries Ltd., the Indian company seeking to buy LyondellBasell Industries AF, said it raised 26.8 billion rupees ($576 million) selling shares.
India’s largest company by market value sold 25.9 million shares at an average price of 1,035 rupees apiece, Reliance said in a statement to the Bombay Stock Exchange today. Life Insurance Corp. of India bought 25 million shares, a person familiar with the matter said.
The sale, the second such transaction by Reliance in less than four months, was at a 5 percent discount to the stock’s Dec. 31 closing price. Reliance’s Petroleum Trust unit raised $664 million selling shares to investors on Sept. 17.
“It is difficult to sell such large volumes of shares at market prices so the discount is not unusual,” said Apurva Shah, head of research at Prabhudas Lilladher Pvt. in Mumbai. “With a possible LyondellBasell deal around the corner, Reliance could be raising money for the purchase.”
Shares of Reliance Industries fell 1.4 percent, the most in two weeks, to 1,075.50 rupees in Mumbai trading. The benchmark Sensitive Index gained 0.5 percent. The stock rose 77 percent last year.
Lyondell Chemical Co. filed a plan to reorganize with the U.S. Bankruptcy Court last month as it evaluates an offer from Reliance, pitting the Indian company against lenders in a battle for the bankrupt chemical maker.
Reliance may pay as much as $12 billion for a controlling stake, Victor Shum, a Singapore-based senior principal at energy consultant Purvin & Gertz Inc., said in November when Reliance announced it made a non-binding all-cash bid to acquire LyondellBasell. The Mumbai-company hasn’t made details of its bid public.
Treasury Stock
Reliance created so-called treasury stock in 2002 when it merged with unit Reliance Petroleum Ltd., which constructed its first 660,000 barrel-a-day crude oil refinery at Jamnagar in Gujarat state. The company had 368 million such shares before today’s sale, K.R. Choksey Shares & Securities Pvt. said in a note.
Reliance has $4.65 billion of cash and cash equivalent and $7.9 billion in treasury stock, according to K.R. Choksey.
Life Insurance Corp. is the largest institutional shareholder in Reliance with a 6.07 percent stake as of Sept. 30, according to data compiled by Bloomberg.
Citigroup Inc. and Morgan Stanley managed the stock sale, according to Bloomberg data.
India’s largest company by market value sold 25.9 million shares at an average price of 1,035 rupees apiece, Reliance said in a statement to the Bombay Stock Exchange today. Life Insurance Corp. of India bought 25 million shares, a person familiar with the matter said.
The sale, the second such transaction by Reliance in less than four months, was at a 5 percent discount to the stock’s Dec. 31 closing price. Reliance’s Petroleum Trust unit raised $664 million selling shares to investors on Sept. 17.
“It is difficult to sell such large volumes of shares at market prices so the discount is not unusual,” said Apurva Shah, head of research at Prabhudas Lilladher Pvt. in Mumbai. “With a possible LyondellBasell deal around the corner, Reliance could be raising money for the purchase.”
Shares of Reliance Industries fell 1.4 percent, the most in two weeks, to 1,075.50 rupees in Mumbai trading. The benchmark Sensitive Index gained 0.5 percent. The stock rose 77 percent last year.
Lyondell Chemical Co. filed a plan to reorganize with the U.S. Bankruptcy Court last month as it evaluates an offer from Reliance, pitting the Indian company against lenders in a battle for the bankrupt chemical maker.
Reliance may pay as much as $12 billion for a controlling stake, Victor Shum, a Singapore-based senior principal at energy consultant Purvin & Gertz Inc., said in November when Reliance announced it made a non-binding all-cash bid to acquire LyondellBasell. The Mumbai-company hasn’t made details of its bid public.
Treasury Stock
Reliance created so-called treasury stock in 2002 when it merged with unit Reliance Petroleum Ltd., which constructed its first 660,000 barrel-a-day crude oil refinery at Jamnagar in Gujarat state. The company had 368 million such shares before today’s sale, K.R. Choksey Shares & Securities Pvt. said in a note.
Reliance has $4.65 billion of cash and cash equivalent and $7.9 billion in treasury stock, according to K.R. Choksey.
Life Insurance Corp. is the largest institutional shareholder in Reliance with a 6.07 percent stake as of Sept. 30, according to data compiled by Bloomberg.
Citigroup Inc. and Morgan Stanley managed the stock sale, according to Bloomberg data.
Saturday, January 02, 2010
Be curious about companies
Since the Satyam scam, the focus on corporate governance has increased manifold. Investors should keep a close watch on a company’s activities to ensure safety of their money.
On January 7, 2009, Satyam Computer Services’ Chairman Ramalinga Raju informed shareholders that he had “cooked” the company’s books for years. Raju’s statement opened a can of worms that had investors and fund managers questioning the veracity of several companies’ numbers who had dubious dealings in the past.
There were several calls for improving corporate governance of listed entities. In fact, the market regulator, the Securities and Exchange Board of India (Sebi), introduced peer review, whereby another auditor would scrutinise a company’s financial documents with their existing auditor.
Irrespective of the debate, corporate governance is one of the key areas that investors should look at before putting their money in stocks. Some companies, such as HDFC and Infosys, get better valuations because of transparency. If you look at most of the corporate bankruptcies globally in the last two decades, you will find that a majority of the businesses failed not because of market conditions, but due to lack of corporate governance.
While financial results, earnings per share (EPS) and operating margins show the quantitative characteristics of a company, the qualitative ones are judged by corporate governance and ethical behaviour. All these combined have a bearing on the stock prices of a company.
Simply put, corporate governance is a system of checks and balances between a company’s board, its management and investors. The system strives to create shareholder value. And scandals like Enron, Worldcom and Satyam are painful reminders that companies, which do not follow ethical values, are likely to hurt both employees and investors.
Studies have proved that good corporate governance not only increased investors’ confidence, but also brought down the cost of capital for the company. A company that is transparent has standardised accounting practices, free flow of information and clear policies. They even find it easier to sail through bad times and secure support of stakeholders in times of difficulty.
Let’s look at some of the practices companies with better corporate governance follow and how one should interpret their actions as an investor.
INTERNAL
Board-level governance: Independence of the Board and professionalism are key to corporate governance. The Board is required to discharge its fiduciary obligations. Look for companies that have proper committees to decide on remuneration, audit, nomination, investor grievances and so on.
Auditors: Auditors should keep proper checks and balances on company affairs. In case of any wrongdoing, they should report to the Board and shareholders. In case of Satyam, its auditor Pricewaterhouse faced a lot of flak.
Investor servicing: Companies with good governance adopt greater transparency in their reporting. They provide proper disclosures to their shareholders and are prompt in resolving investor grievances. Many companies’ governance is reduced to a narrative in a paragraph in the annual report or directors’ reports. This should not be the case. Corporate governance should be part of the Board’s responsibility towards shareholders.
Shareholder participation: Institutional investors have the means to play an active role in ensuring that the management doesn't go off-track. The institutional investors can demand the required changes at companies they have invested in.
For instance, just a couple of weeks before Raju admitted to fudging Satyam’s books, institutional investors blocked his proposal to buy a majority stake in his family owned Maytas Infrastructure by using the cash in the company’s balance sheet.
Forming minority shareholders' groups can also be a positive step. There are several activist minority shareholders abroad, who constantly keep a check on the company’s plans. Individual or retail shareholders should use these groups to communicate with institutional shareholders for taking up their concerns with the company's management. They can always question a company’s governance at the annual general meetings.
EXTERNAL
Rating: Rating agencies, such as CRISIL and ICRA rate companies on the basis of corporate governance. Ratings enable the stakeholders to know how much importance the company attaches to corporate governance.
Self-regulatory bodies: Industry should be encouraged to form self-regulatory bodies to look at improving governance at industry level. This can be by way of standardised disclosures, fair practices, customer care initiatives and so on. This is seen in case of banks (Indian Bankers’ Association) and automobile companies (Automobile Association of India).
While these pointers are mostly associated with good governance, there are some clear signals about misgovernance. For instance, stay away from companies which have been accused of under or over reporting of revenues and profits, misrepresentation of facts, insider trading, oppression of minority shareholders, non-payment of dividend and interest to lenders/depositors. Sometimes, companies are even debarred from raising capital from the financial markets because of the above traits. Investors need to keep an eye on such developments to separate the good from the bad.
On January 7, 2009, Satyam Computer Services’ Chairman Ramalinga Raju informed shareholders that he had “cooked” the company’s books for years. Raju’s statement opened a can of worms that had investors and fund managers questioning the veracity of several companies’ numbers who had dubious dealings in the past.
There were several calls for improving corporate governance of listed entities. In fact, the market regulator, the Securities and Exchange Board of India (Sebi), introduced peer review, whereby another auditor would scrutinise a company’s financial documents with their existing auditor.
Irrespective of the debate, corporate governance is one of the key areas that investors should look at before putting their money in stocks. Some companies, such as HDFC and Infosys, get better valuations because of transparency. If you look at most of the corporate bankruptcies globally in the last two decades, you will find that a majority of the businesses failed not because of market conditions, but due to lack of corporate governance.
While financial results, earnings per share (EPS) and operating margins show the quantitative characteristics of a company, the qualitative ones are judged by corporate governance and ethical behaviour. All these combined have a bearing on the stock prices of a company.
Simply put, corporate governance is a system of checks and balances between a company’s board, its management and investors. The system strives to create shareholder value. And scandals like Enron, Worldcom and Satyam are painful reminders that companies, which do not follow ethical values, are likely to hurt both employees and investors.
Studies have proved that good corporate governance not only increased investors’ confidence, but also brought down the cost of capital for the company. A company that is transparent has standardised accounting practices, free flow of information and clear policies. They even find it easier to sail through bad times and secure support of stakeholders in times of difficulty.
Let’s look at some of the practices companies with better corporate governance follow and how one should interpret their actions as an investor.
INTERNAL
Board-level governance: Independence of the Board and professionalism are key to corporate governance. The Board is required to discharge its fiduciary obligations. Look for companies that have proper committees to decide on remuneration, audit, nomination, investor grievances and so on.
Auditors: Auditors should keep proper checks and balances on company affairs. In case of any wrongdoing, they should report to the Board and shareholders. In case of Satyam, its auditor Pricewaterhouse faced a lot of flak.
Investor servicing: Companies with good governance adopt greater transparency in their reporting. They provide proper disclosures to their shareholders and are prompt in resolving investor grievances. Many companies’ governance is reduced to a narrative in a paragraph in the annual report or directors’ reports. This should not be the case. Corporate governance should be part of the Board’s responsibility towards shareholders.
Shareholder participation: Institutional investors have the means to play an active role in ensuring that the management doesn't go off-track. The institutional investors can demand the required changes at companies they have invested in.
For instance, just a couple of weeks before Raju admitted to fudging Satyam’s books, institutional investors blocked his proposal to buy a majority stake in his family owned Maytas Infrastructure by using the cash in the company’s balance sheet.
Forming minority shareholders' groups can also be a positive step. There are several activist minority shareholders abroad, who constantly keep a check on the company’s plans. Individual or retail shareholders should use these groups to communicate with institutional shareholders for taking up their concerns with the company's management. They can always question a company’s governance at the annual general meetings.
EXTERNAL
Rating: Rating agencies, such as CRISIL and ICRA rate companies on the basis of corporate governance. Ratings enable the stakeholders to know how much importance the company attaches to corporate governance.
Self-regulatory bodies: Industry should be encouraged to form self-regulatory bodies to look at improving governance at industry level. This can be by way of standardised disclosures, fair practices, customer care initiatives and so on. This is seen in case of banks (Indian Bankers’ Association) and automobile companies (Automobile Association of India).
While these pointers are mostly associated with good governance, there are some clear signals about misgovernance. For instance, stay away from companies which have been accused of under or over reporting of revenues and profits, misrepresentation of facts, insider trading, oppression of minority shareholders, non-payment of dividend and interest to lenders/depositors. Sometimes, companies are even debarred from raising capital from the financial markets because of the above traits. Investors need to keep an eye on such developments to separate the good from the bad.
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