Sunday, March 08, 2009
The Company Law Board (CLB) passed an order on Maytas Infra Ltd. and Maytas Properties Ltd., the two companies promoted by B. Ramalinga Raju, the tainted founder of IT major Satyam Computer Services Ltd. It asked the Government to appoint four nominees on Maytas Infra's board. One of the government's nominee members will be the chairman of Maytas Infra, the CLB said. The Government will have majority representation on Maytas Infra board. The new Maytas Infra board should give a monthly report to the Government, beginning the first week of April, the CLB said in its order. No government agency should initiate any criminal or punitive action against these nominee directors without the prior approval of the CLB, it added. The new Maytas Infra board cannot meet without at least two government nominees, the CLB said. The CLB, which turned down the Centre's petition to supercede Maytas Infra's board, also asked the Government to appoint one director on Maytas Properties' board.
Hurray. Hurray. It’s a holi, holiday! That seems to be the only cheerful news for the coming week. In fact markets will remain closed on Tuesday for Eid and on Wednesday for the festival of colors – Holi. Investors will hope that the red in the air turns to green soon as markets worldwide grapple with multiple headwinds.
Among key data to be announced next week include IIP numbers. Contraction in industrial production is expected to continue and remain in negative zone. The overall auto sales numbers for the month of February will also be announced. Some healthy growth will be seen here. Inflation is likely to dip below the 3% mark next week but markets could hardly care about this.
The way global markets swing will determine our market movement in the three-day trading week.
India's merchandise exports fell 16% in January over the same period a year earlier, as recession in the key overseas markets - the US and EU - continued to depress demand for its products, data released by the Government showed. January exports stood at US$12.38bn while imports declined by 18% to US$18.46bn, translating into a trade gap of US$6.08bn versus US$7.85bn in the year-ago period, the Commerce & Industry Ministry said in a statement. This was the fourth straight month of decline in merchandise exports, and also the worst since May 1998, when overseas sales fell 17.22%. Exports were down 1.1% in December, 9.9% in November and 12.1% in October. In the Indian rupee terms, exports were up 4.3% over the value of exports during January 2008, while imports increased by 1.4%. Meanwhile, media reports said that exports fell by 13% in February while imports declined by around 18%, according to quick estimates released by the Government. If India is to hit its revised export target of US$175bn for this fiscal year - recently lowered from the original US$200bn - exports need to grow by 18% in March.
Our decrease in net worth during 2008 was $11.5 billion, which reduced the per-share book value of both our Class A and Class B stock by 9.6%. Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.
The table on the preceding page, recording both the 44-year performance of Berkshire’s book value and the S&P 500 index, shows that 2008 was the worst year for each. The period was devastating as well for corporate and municipal bonds, real estate and commodities. By yearend, investors of all stripes were bloodied and confused, much as if they were small birds that had strayed into a badminton game. As the year progressed, a series of life-threatening problems within many of the world’s great financial institutions was unveiled. This led to a dysfunctional credit market that in important respects soon turned non-functional. The watchword throughout the country became the creed I saw on restaurant walls when I was young: “In God we trust; all others pay cash.”
By the fourth quarter, the credit crisis, coupled with tumbling home and stock prices, had produced a paralyzing fear that engulfed the country. A freefall in business activity ensued, accelerating at a pace that I have never before witnessed. The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear.
Reliance Industries Ltd. (RIL) said that its Board of Directors approved a Scheme of Amalgamation of Reliance Petroleum Ltd. (RPL) with the company. The Scheme is subject to necessary approvals of shareholders and creditors and sanctions of the High Courts in Mumbai and Gujarat. The Appointed Date of the amalgamation is April 1. Upon completion of the amalgamation, shareholders of RPL will receive 1 fully paid equity share of Rs10 each of RIL for every 16 fully paid equity shares of Rs10 each of RPL held by them on the record date to be fixed later.
RIL’s equity stake in RPL will rise to 75.4% before the proposed merger as it first buys out Chevron’s 5% equity stake in RPL. After the merger, RIL’s 75.4% equity stake in RPL will be cancelled and hence should not lead to creation of any fresh treasury shares. Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to the existing shareholders of RPL. This will result in a 4.4% increase in equity base from Rs15.74bn shares to Rs16.43bn. Consequently, the promoter holding in RIL will reduce from 49.0% to 47.0%.
The merger will unlock significant operational and financial synergies that exist between the two companies, RIL said in a statement. It creates a platform for value-enhancing growth and reinforces the company's position as an integrated global energy company, it added. The merger will enhance value for shareholders of both companies and is EPS accretive, RIL said.
Commenting on the merger, Mukesh Ambani, Chairman and MD, RIL said: "This merger follows Reliance Industries’ philosophy of creating enduring value for all our stakeholders. It is a significant step in our goal to be among the largest global corporations."
Analysts' reaction was mixed to the merger. Some say that the new refining capacity amid shrinking global oil demand will keep refinery utilization rates low and refining margins weak. "As a pure refiner with high gasoline yield, RPL faces near-term downside to its margins," says Goldman Sachs. The market too gave a lukewarm response to the merger ratio, with both the stocks actually falling slightly on the day of the announcement. Over the week, the two stocks slipped further amid a broad decline in the Indian stock market.
The Reserve Bank of India (RBI) decided to lower short-term borrowing costs by 50 basis points as part of its continuous efforts to revive lending and boost consumption as well as investments in a sluggish economy. As a result, the central bank cut the repo rate by 50 bps to 5% with immediate effect. Repo rate is the rate at which the RBI lends money to banks. The RBI also trimmed the reverse repo rate by 50 bps to 3.5% with immediate effect. The move didn't have much of an impact on the markets. The stock market actually declined amid mounting concerns over the worsening global situation. The bond market on the other hand continued to be under pressure due to high Government borrowings and the consequent surge in the fiscal deficit.
"It is expected that the reduction in the policy interest rates will further encourage banks to provide credit for productive purposes at viable interest rates," the RBI said in a statement. The central bank added that it would continue to maintain ample liquidity in the banking system. "Since the release of the Q3 review on January 27, the global financial and economic conditions have further deteriorated, the RBI said, adding that the uncertainty on the recovery has increased.
Since mid-September 2008, the RBI has reduced the repo rate by 400 bps from 9% to 5%, while the reverse repo rate has been slashed from 6% to 3.5%. The cash reserve ratio (CRR) has been cut from 9% to 5% of net demand and time liabilities (NDTL) while the statutory liquidity ratio (SLR) has been lowered from 25% to 24% of NDTL. The cumulative amount of actual or potential primary liquidity made available to the financial system through various measures initiated by the RBI amounts to over Rs3.88bn.
Concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth, the RBI said. The central bank continues to urge banks to monitor their loan portfolio and take early action, to prevent asset impairment down the road and safeguard the gains of the last several years in improving asset quality, it added. At the same time, banks should price risk appropriately and ensure that creditworthy enterprises continue to get funding, the RBI said.
With elections to be held between April 16 and May 13th and a new government likely only by June, the onus of reversing the current economic deceleration will largely fall on the RBI. Given that inflation is sliding steadily there is a chance that the central bank may go for further monetary easing in the coming months. While the RBI may not touch the reverse repo rate, it is likely to move towards more quantitative easing through open market operations. We also expect the RBI to cut the CRR. A critical issue is whether banks are willing to lower rates further given the rising risk aversion.
There are enough reasons to do so as well. Q3 GDP rose by less than expected 5.3%, and the full-year figure is expected to be much less than the Government's projection of 7.1%. Data on merchandise trade, manufacturing, infrastructure sector growth, tax revenues, etc. continues to be bleak. Globally, the central banks in the US and Japan have lowered rates to near zero. The Bank of England (BOE) this week cut its benchmark interest rate to 0.5% and introduced quantitative easing. The European Central Bank (ECB) too lowered its key rate by 50 bps to 1.5%. Central banks across the globe continue to maintain soft monetary policy.