Sumitomo Mitsui Banking Corp to sell stake in Kotak Mahindra Bank

Sumitomo Mitsui is looking to sell almost half of its stake in Kotak Mahindra Bank for around $300 million

Shares of Kotak Mahindra Bank closed at Rs.630.25 on the BSE, up by 2.35%, while the benchmark Sensex closed at 23,002 points, down by 0.66%, on a day the stock markets witnessed volatile trading on account of the announcement of the union budget.

Mumbai: Japan’s Sumitomo Mitsui Banking Corp. is looking to sell almost half of its stake in private sector lender Kotak Mahindra Bank Ltd, for around $300 million (approximately Rs.2,050 crore), according to two people aware of the development.

As of 31 December, Sumitomo held a 3.58% stake in the private-sector lender, data from stock exchanges show.

“The book has been launched and the sale is expected to close overnight,” said one of the two people mentioned above, requesting anonymity as he is not authorized to speak to the media.

Large domestic and foreign institutions have shown interest in buying the stake in block trade, he added.

Shares are being offered to buyers in a price range of Rs.611.34 to Rs.636.55 per share, according to Bloomberg. Citigroup Inc. is managing the share sale program, the report added. After the transaction, Sumitomo’s stake in the bank will fall to around 1.79%.

The Japanese bank firm had picked up a 4.5% stake in Kotak Mahindra Bank in 2010 through a preferential allotment for Rs.1,366 crore.

Shares of Kotak Mahindra Bank closed at Rs.630.25 on the BSE, up by 2.35%, while the benchmark Sensex closed at 23,002 points, down by 0.66%, on a day the stock markets witnessed volatile trading on account of the announcement of the Union budget.

Also, on Monday, California Public Employees’ Retirement System (CalPERS), the largest pension fund in the US, sold a stake worth around Rs.870 crore (approximately $127 million) in Axis Bank Ltd, according to data at stock exchanges.

Foreign institutional investor (FII) Genesis Indian Investment Co. Ltd bought the stake (around 0.94%) at a price of Rs.387.5 per share.

Last month Genesis bought a stake worth Rs.318 crore in Dabur India Ltd through an open market transaction, according to information on stock exchanges. The FII bought about 12.7 million shares, or a 0.72% stake, in Dabur.

In 2015, California Public Employees’ Retirement System, had assets under management of $298 billion, according to Preqin, a private equity database.

Shares of Axis Bank closed at Rs.375.25 on the BSE, down by 2.75%.

Sun Capital

Budget 2016: Food marketing opened to MNC multi-brand retailers

In a major move, the government has opened the food sector to 100% foreign direct investment (FDI) to multi-brand retailers via the Foreign Investment Promotion Board..

In a major move, the government has opened the food sector to 100% foreign direct investment (FDI) to multi-brand retailers via the Foreign Investment Promotion Board (FIPB) route. Finance minister Arun Jaitley announced in the Budget, presented on Monday, that, “100% FDI will be allowed through the FIPB route in the marketing of food products produced and manufactured in India”.

This basically means that foreign retailers in the food sector can set up marketing outlets in the country but will have to sell food products manufactured by Indian producers. Analysts said this means that Global retailers like Marks and Spencer’s or Tesco, which have food services units, can now set up marketing outlets in the country where they can sell food products manufactured by Indian companies.

Food processing minister Harsimrat Kaur Badal said on Tuesday that 100% FDI will be permitted only in multi-brand retailing of food products, and not in all items. Also, while the extant rule on FDI in multi-brand retailing of any product mandates that at least 30% of raw materials have to be sourced from the domestic market, in food processing, a foreign retailer will have to procure 100% of raw materials from domestic sources to be eligible to bring in 100% FDI.

If a foreign retailer doesn’t wish to source the entire raw materials from the domestic market for multi-brand retailing in food products, it can still set up shop, but the FDI has to be restricted to 51%. Also, it has to fulfill the usual conditions stipulated for multi-brand retailing, food processing secretary Avinash Srivastava told FE.
Currently, rules allow foreign food firms to set up shop in the country to produce and market their products like Coca-Cola or Pepsi does. However, the new proposal opens room for any global retailer to simply market products manufactured by Indian companies.

“This can range from tying up with small domestic retailers making some specific food products, who do not have the wherewithal to expand, or having alliance with even big players. The detailed rules will be known when the department of industrial policy and promotion comes out with the guidelines,” says Harminder Sahni of Wazir Advisors, a New Delhi-based retail industry consulting firm. The new rules will now allow “foreign companies to set up up shops here and bring in a lot of technology such as cold chains” to reduce wastage and improve efficiency in farming.

The domestic consumer retail market is estimated at about R12 lakh crore, of which half consists of selling food and food products. The wastage of food from the farm before it reaches the consumer is estimated to be about 15%-20%, or about R92,000 crore, every year because of lack of storage facilities and transportation.

“Allowing 100% foreign investment in the retail of domestically-processed food will give farmers greater access to the market and also encourage food firms to innovate, so that food is available in enough quantities to feed everyone as well as fits their pockets” said Siraj Chaudhry, chairman of Cargill India, the firm that makes and sells the Leonardo range of olive oils, Gemini, NatureFresh, Sweekar, Rath and Sunflower Vanaspati.

Echoing similar sentiments, Krish Iyer, president of Walmart India, said the move would encourage the industry to produce locally rather than import food products and sell it here. “This far-reaching reform will benefit farmers, give impetus to food the processing industry and create vast employment opportunities,” Iyer said.

By Sun Capital

New RBI norms to help banks unlock Rs. 40,000 cr

Central bank eases norms governing treatment of certain balance sheet items

The Reserve Bank of India on Tuesday relaxed norms relating to the treatment of certain balance-sheet items, including property, which will help banks unlock capital aggregating about Rs.40,000 crore.

This capital relief comes at a time when the banks, especially those in the public sector, are struggling with bad loans, provisioning requirements and falling equity market valuations.

The revised norms will give PSBs access to additional capital of Rs. 35,000 crore, while it could be about Rs.5,000 crore for private sector banks.

The unlocking of capital follows a review carried by the RBI with the aim of further aligning the definition of regulatory capital with the globally adopted Basel III norms.

These standards aim to improve the banking sector’s ability to absorb shocks arising from financial stress and improve risk management and governance.

Banks have now been allowed to include some items, such as property value and foreign exchange, for calculation of Tier 1 capital (CET1), instead of Tier 2 capital.

Analysts say State Bank of India may benefit a great deal from the change in the carrying amount of a bank’s property as it has huge property holdings across the country.

As per RBI norms, CET1 capital, comprising paid-up equity capital, statutory reserves, capital reserves, other disclosed free reserves (if any), and balance in P&L Account at the end of the previous fiscal year, must be at least 5.5 per cent of risk-weighted assets.

By Sun Capital

Why Morgan Stanley’s action on Flipkart is bad news for Indian unicorns

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company.

Bengaluru/New Delhi: Late last month, Flipkart India Pvt. Ltd, the country’s largest and most valuable Internet company, got a taste of the exacting standards of US stock markets, where it hopes to list.

On Friday, Morgan Stanley Institutional Fund Trust, a minority investor in Flipkart, disclosed a write-down in the value of its holdings in the company by as much as 27%. The mutual fund reported the number in a filing with the Securities and Exchange Commission (SEC), the US stock markets regulator.

Flipkart was valued at $15 billion when it received $700 million from Tiger Global Management, Qatar Investment Authority and other investors in June.

That was its fourth round of fund-raising in a year. Its valuation shot up roughly fivefold from $2.5-3 billion in May 2014.

Morgan Stanley’s latest estimate implies the mutual fund now values Flipkart at $11 billion.

The markdown is significant not only because it proves that Flipkart’s valuation had run ahead of itself, but also because mutual funds comprise one of the largest institutional buyers of shares in stock markets.

At least two other mutual funds, T. Rowe Price and Baillie Gifford, are investors in Flipkart. T. Rowe Price hasn’t yet reported the latest estimated value of its stake in the company.

Given that Flipkart is expected to list its shares in the US at some point over the next few years, the valuation estimates of the mutual funds will be an important indicator of how stock market investors will value the company. Flipkart declined to comment for this story.

Flipkart is hardly the only unicorn, a term that is used to describe start-ups that are valued at more than $1 billion, to have its value marked down by mutual fund investors.

Along with cutting the value of its stake in Flipkart, Morgan Stanley also reduced the worth of its holdings in file storage company Dropbox Inc. and data analytics company Palantir Technologies Inc. Late last year, mutual funds owned by T. Rowe Price, Fidelity and BlackRock cut the worth of their holdings in US unicorns en masse.

BlackRock is also an investor in online marketplace Snapdeal (Jasper Infotech Pvt. Ltd), which raised roughly $50 million last month at a valuation of $6.5 billion. BlackRock’s next filing on Snapdeal will be closely watched to see if other Indian unicorns will be marked down, too.

Snapdeal’s $50 million fund-raising, which was accompanied by $150 million in share sales by existing Snapdeal investors to new shareholders, took more than six months to close, primarily because there are not too many takers for India’s top e-commerce firms at their current valuations. The $50 million fund-raising was also significantly smaller than what online retailers typically seek from investors.

Mint reported on 4 February that China’s Alibaba Group is in early talks to buy a stake in Flipkart and increase its holding in Snapdeal. The talks are at a very initial stage and the likelihood of a deal is a function of Flipkart’s willingness to offer a discount on its current valuation of $15 billion, Mint had reported then.

“Our valuation has grown steadily between our last two funding rounds,” a Snapdeal spokesperson said.

There are two broad concerns about the valuations of Flipkart and Snapdeal. One, whether they will ever be able to cut their ballooning losses without sacrificing sales growth. Two, whether they will lose out to the Indian unit of Amazon.com Inc., the world’s largest online retailer.

Over the course of 2015, Amazon gained market share in India at the expense of both Flipkart and Snapdeal, according to publicly available data and several company executives.

Future estimates by mutual funds of their holdings in Flipkart and Snapdeal—and these companies’ eventual IPOs—will depend a lot on these two factors.

“Growing at negative operating margins to raise money in quick succession is a destructive style of doing business,” said Kashyap Deorah, serial entrepreneur and author of The Golden Tap, a book on India’s hyper-funded start-up ecosystem. “It kills the ecosystem... to build a thriving long-term business environment, we need to get off the addiction of global funds buying market spaces in India like territory.”

Deorah predicts Flipkart’s valuation will eventually slump to the amount it has invested. Flipkart has raised anywhere between $3 billion and $3.5 billion. “The downward trend will continue until Flipkart’s valuation equals invested capital,” he said.

To be sure, Deorah’s prediction seems extreme.

Flipkart is still the largest e-commerce firm in the last remaining big e-commerce market in the world. It has a solid brand, a strong leadership team and deep-pocketed investors, among other strengths.

“Flipkart’s valuation may look stretched at $15 billion in this current environment, but you can’t take away the fact that the company still has a solid business,” a Flipkart investor said on condition of anonymity. “In the worst-case scenario, it may take the company a year or two to grow into that valuation. But it will definitely happen. And if the market sentiment becomes better, it will happen sooner.”

By Sun Capital

Publish list of loan defaulters, AIBEA asks Centre

Suncapital.co.in: All India Bank Employees Association today urged the government to publish a list of defaulters, who had failed to repay loans worth over Rs 100 crore.

Responding to a question on the expectations of bank employees from the general budget to be presented tomorrow, AIBEA General Secretary C H Venkatachalam told reporters here that the banking sector was awaiting implementation of reforms for the betterment of bank services.

The government should offer loans to farmers at lower interest rates, so that the sector could again contribute substantially to the GDP, he said.
The banks, which were lending money with small savings of Rs 90 lakh crore, should open five lakh branches in the rural areas, where there were no branches, Venkatachalam suggested.
As the government was attempting to waive NPAs, reportedly worth about Rs 2 lakh crore, it should come up with a defaulters' list who had failed to repay their loans and book a criminal case and initiate stringent action against them, he said while referring to the reports that business tycoon Vijay Mallya, who owed thousand of crores rupees to several banks, was allegedly planning to leave India.

By Suncapital.co.in

Tax to GDP ratio, redux

Suncapital: In a recent column in this newspaper (“India is an outlier in its tax policy”, 23 February), my IDFC Institute colleague, Praveen Chakravarty, and I peered into the Pandora’s box of public finance in India, arguing that India’s tax to gross domestic product ratio (GDP) is low by any relevant empirical benchmark. That particular trunk was prised open by French economist Thomas Piketty on a recent whirlwind tour of India. Readers will recall that it is he who has argued both that taxes are too low as a share of GDP, and that this contributes to a worsening inequality problem in India.

Now, the Economic Survey 2015-16 has a chapter devoted largely to tax to GDP ratio—for the first time so far as I am aware. Arvind Subramanian, chief economic adviser and architect of the survey, deserves enormous credit for turning what to many might have been an arcane technical issue into a live public policy debate.

The headline finding in chapter 7 of the survey is that, when controlling for GDP per capita, India is not, in fact, a negative outlier, as Chakravarty and I had claimed. Who is right?

Start with a simple statistical argument: an outlier is always relative to a given data set. So while, as we ourselves documented, the data clearly show that India’s tax to GDP ratio is low compared not just to the Organisation for Economic Co-operation and Development but also emerging economies—see table 1 in chapter 7—the report then goes on to argue that this vanishes when controlling for the level of per capita GDP, as presented in figure 2.

However, the report itself then establishes—see figure 3 and table 2—that when democracy is added as an additional control, India re-emerges as a negative outlier in total tax to GDP ratio, as also total government expenditure and especially health and education expenditure as shares of GDP.

Further, I would conjecture that, were an additional control added for resource-rich economies whose public finance is markedly different from other major economies, the survey’s finding would be enhanced further, and India would be even more of a negative outlier in its tax to GDP ratio. Preliminary results by Chakravarty reinforce this conjecture.

One other claim in the chapter needs to be probed further. In section 7.13, it is asserted: “India’s tax to GDP ratio has increased by about 10 percentage points over the past six decades from about 6% in 1950-51 to 16.6% in 2013-14.”

While this is true, it is incomplete and perhaps misleading. As Chakravarty and I documented, this increase occurred almost entirely in the first three decades, whereas the tax to GDP ratio has remained largely flat in the 16-17% range since 1991, the year that launched economic reforms. Further, our analysis demonstrated that there is, in statistical jargon, a structural break in 1991, as even eyeballing the data suggests.

This poses an enormous public policy puzzle, and indeed it contradicts the survey’s claim that tax to GDP ratio tends to rise with per capita income. For, in India’s case, tax to GDP ratio rose during a period when growth of GDP per capita was fitful and slow, whereas, when GDP per capita took off after 1991, tax to GDP ratio did not keep pace!

The bottom line of the empirical research is that, depending on how you slice and dice the data, you can find that India’s tax to GDP ratio is a negative outlier, as Chakravarty and I argue, or that it is not, as the Economic Survey argues. This invites the question, is there any theoretical basis to assert that tax to GDP ratio should rise with per capita income?

As it happens, the survey chapter does not provide a persuasive theoretical counterpart to its empirical findings. There is some suggestion that the state’s legitimacy and taxing capacity may rise with per capita GDP, thereby allowing tax to GDP ratio to increase. But this argument is not rigorously articulated. Nor does it allow for the possibility of reverse causation, such that a rising tax (and government spending) to GDP ratio allows GDP per capita to rise more rapidly, which could confound any causal claims based on the survey’s empirical results.

My own hunch is that, as a baseline, the tax to GDP ratio is likely to remain approximately constant as GDP per capita rises, at least for mature economies, however one defines these. (For the wonkish: this would follow if the income elasticity of government spending is approximately unity, and if government spending is financed, on average, only by current taxes, so that, on average, the government is running a balanced budget.) What this implies is that, once society has decided how much it wants to spend—which fixes the ratio of government spending to GDP—the tax to GDP ratio will be pinned down, and thereafter tax and government spending will rise roughly in proportion to GDP, so that the ratios will remain approximately constant.

In simpler language, in the long run, Indian governments will choose to tax more, if they wish to spend more. That appetite seems lacking at present. There’s the rub.

By Suncapital.co.in

Budget 2016: Startups not excited, expected more from government

Suncapital: The startup world reacted with muted enthusiasm to the budget, showering mild praise on proposals, which were anyway anticipated, and urging the government to do more to remove burdensome tax rules. 

Finance minister Arun Jaitley kept the prime minister's word on tax breaks on profits made by startups, and followed through on another promise by proposing to amend the Companies Law to make it easier to start a business. 

These moves, however, were anticipated and most movers and shakers in the startup community were not overly excited by what they saw.

"PM Modi set very high expectations for startups in his January speech," said Ravi Gururaj, the chairman of software industry group Nasscom's product council, referring to Modi's address at the Startup India event organised by the government in New Delhi. "The budget today is lukewarm at best for startups." 

In addition to allowing 100% profit deductions in three out of the first five years for startups set up between April 1, 2016 and March 2019, Jaitley said investors in unlisted companies will be eligible for longterm capital gains treatment in two years instead of three.

Venture capital investors were asking to be treated on par with the public market investors for whom the time limit is one year. 

Vijay Shekhar Sharma, the founder of mobile marketplace Paytm, said that while reducing the time-frame for capital gains to two years is positive, it would not have any major impact because few investors exit in two years.
Moreover, since startups normally don't make profits in the first few years, tax breaks on profits are not very useful, either.

"Startups will still be liable for MAT (Minimum Alternate Tax), so the effective benefit is not likely to be very significant," he said. 

The NDA government — and particularly Prime Minister Modi —has been eager to project a startup-friendly image, engaging closely with founders and even coming up with its 'Startup India Stand Up India' programme to promote entrepreneurship. The government's initiatives have been generally wellreceived, but this budget seems to have fallen somewhat short of high expectations. 

On Monday, Jaitley also announced that the cabinet has approved the 'Stand Up India' scheme and allocated Rs 500 crore for Dalit and women entrepreneurs. 

iSPIRT said that the proposals to make it easier to start up, capital gains relaxation and the plan to tax income from patents at 10% were all good moves.

But confusion between "goods" and "services" for online downloads has not been cleared and foreign entities continue to sell to consumers without paying any tax here.
"The budget is semi-sweet with specific sops in continuation of earlier policy announcements made by PM," it said. 

Bhavish Aggarwal, the cofounder of Ola, said he is pleased with what he sees in the budget.

"Creating inroads for entrepreneurship in the public transportation space and amendments in the Motor Vehicles Act to allow innovations will provide a strong impetus towards enabling mobility for citizens," he said. (With inputs from Biswarup Gooptu and Madhav Chanchani)

Sun Capital Advisory Service

How Startups Reacted to the Union Budget 2016

Suncapital: The much awaited Union Budget 2016-17 has finally been unveiled today. In his presentation, Finance Minister Arun Jaitley announced a 100% tax deduction programme for 3 years over a period of five years for startups approved before FY2019 under the Startup India scheme.

Moreover, to ensure that only deserving enterprises get to reap the benefits of the “Start Up Action Plan”, the government has strictly defined the term ‘Startup’ as “a company which would have equity funding of at least 20% by incubation, angel or private equity fund, an accelerator or angel network registered with SEBI endorsing the innovative nature of the business.”

Jaitley in his presentation, expatiated on a series of policy initiatives and schemes that aim at eliminating the common challenges startups come across, and ensure that MSMEs in the country get a fillip. Few of the key highlights are:

1. No tax on income from Startups. 100% deduction on profits for startups for 3 out of first 5 years; MAT to apply.

2. Shortening of the holding period of from three to two years to get benefits of long term Capital Gain regime in case of unlisted companies.

3.Registration of a company will take no longer than just a day under the Government’s 1 Day Incorporation Policy.

4.The corporate income tax rate for the next financial year of relatively small enterprises i.e companies with turnover not exceeding Rs. 5 crore (in the financial year ending March 2015) is proposed to be lowered to 29 % plus surcharge and cess. The new manufacturing companies which are incorporated on or after 1.3.2016 are proposed to be given an option to be taxed at 25% plus surcharge and cess provided they do not claim profit linked or investment linked deductions and do not avail of investment allowance and accelerated depreciation.

Here’s how the Ecosystem Reacted to the Announcements:

NASSCOM welcomed the Union Budget 2016, while terming it as a mixed bag for the sector. The budget reiterates the 7.6% GDP growth rate for the country and provides a slew of incentives for the rural, agricultural sector to enable inclusive growth. Mohan Reddy, Chairman, NASSCOM said, “Our wish list for Budget 2016 included three key priorities – policy bottlenecks including ease of business; nurturing start-ups, products and eCommerce sector; and clarifications on transfer pricing to enable inward investments in India. Budget 2016 only partially covers these priorities. Extension of Section 10AA for SEZ units till 2020 is a positive outcome though the imposition of MAT on startups will not allow the full impact of the benefits to be realized.”

Expressing his happiness on Aadhar and IndiaStack, Vijay Shekhar Sharma, Founder and CEO, Paytmmaintained, “Finally, the government has provided legislative backing that will unleash the full potential of such an incredible platform. With the focus on digital payments and incentives to startups, the Finance Minister has boosted our Prime Minister’s Digital India and Startup India plans. Overall, the budget creates a strong foundation for sustainable growth in rural & urban India. Steps to further improve Ease Of Doing Business will drive entrepreneurship which is essential for job creation.”

Putting forth his opinion on the matter, Ajay Jalan, Founder & Managing Partner, Next Orbit Ventures said, “We welcome the initiatives taken by The Finance Minister Mr. Arun Jaitley, however we were looking forward for government support in creating a positive environment pertaining to venture capital (VC) and private equity (PE) funds in India, and bringing it at par with the global standards. We were expecting regulators should help unlock domestic capital pools by encouraging institutions regulated by them to invest in VC/PE asset classes. Pensions & provident funds should have been encouraged and investment limits for banks & insurance companies in VC/PE Funds could have been increased from 10% to 25%.

Here’s what Siddhartha Roy, CEO of Hungama.com opines- “The Union Budget 2016 has stepped in the direction to pave the way for rural digitization with a focus on digital literacy. The aim to connect 6 crore households will provide a stronger reach and deeper penetration for digital and technology driven services in rural India thus allowing residents a plethora of services. The digital literacy scheme announced by Mr. Arun Jaitley in rural India will not only give rise to increased manpower but also boost employment generation. The budget is an indication of the government’s resolve towards the Digital India scheme.”

Similarly, Manish Dashputre , Co-Founder, Medidaili, maintained, “We welcome the 100% tax deduction for start ups for 3 years as announced by the government today. However, tax exemption alone will not help spurt the government’s ambition of boosting the start up environment in India on a large scale. Exemption from indirect taxes including MAT would have greatly reduced the compliance burden. Even though the budget has announced several favourable measures, a clear framework to translate policy actions needs to be put in place to foster the start up ecosystem.”

Talking on the same line, Sumit Chhazed, Co-Founder, CredR  stated, “The Union Budget 2016 did not have much to look out for the start-up community, as we were hopeful to see some on-ground initiatives from the government to further ease regulatory clearances policies. Prime Minister’s declaration of 100% tax deductions for new startups for first 3 years is definitely an optimistic move towards nurturing entrepreneurship and facilitating ease of doing business. Government’s effort to provide skill development and training to youth along with implementation of digital literacy will help further providing a boost to the start-up ecosystem. We are hopeful to see more immediate action from the government in fostering a conducive environment for the entrepreneur community.”

Likewise, Pramod Saxena, Chairman and MD, Oxygen Services is of the opinion that  the general direction of the budget as it lays emphasis on development of the rural sector, digitization and reforms in banking is right.  He said, “The digital literacy mission that has been announced which will target 6 crore households with financial literacy, with this the digital connect and payments connect will play an important role. Also, statutory status to Aadhaar will play a very big role in promoting digital payments, social benefit transfers and allowing several services beyond banking & insurance to be also be brought into its fold, whether it is government subsidies or government payments it will open a way for more government payments and subsidies to flow into the financial inclusion program.”

Last but not the least, expressing his thoughts on the subject, Manish Kumar, Co-founder & CEO GREX said, “We believe the Union Budget 2016-17 is well aligned with Prime Minister’s ‘Make in India’ and ‘Startup India’ campaign. The budget focuses clearly on growth, development, job creation and creating a better environment for doing business in India. Besides a particular focus on startups by giving them exemption on their profits for the first three years is a welcome move. The relaxation in capital gain tax for investment in Funds of Funds and reducing the time frame to two years from three for availing long term capital gain tax benefit in the unlisted space will further boost the investment in startups.” Adding further, he stated, “Keeping the ‘Digital India’ momentum rolling during the budget, introduction of electronic auction platform for the private placement market in corporate bonds is a welcome move.”

The Union Budget 2016 has been well accepted by the ecosystem, overall.  However, there is a certain uneasiness that the industry has expressed on the imposition indirect taxes including MAT. Moreover, the effective implementation of the policies that have been announced by the government, is also something that needs to be waited and watched. Nevertheless, the startup community in general, looks quite happy with the government’s emphasis on narrowing down the digital gulf in the country; a move that would definitely help budding enterprises grow faster and expand their footprint across geographies.

Sun Capital Advisory Services

Budget 2016: Jaitley walks a tightrope to fund infrastructure

Suncapital: Budget 2016: Jaitley walks a tightrope to fund infrastructure.

Finance minister Arun Jaitley’s third Union budget had a theme—Transform India. And while reading out the budget speech, Jaitley termed infrastructure and investment as the fifth support pillar of the theme championed by the National Democratic Alliance (NDA) government.

Given that infrastructure forms the backbone of the government’s flagship programmes such as Make in India, the budget announced a higher public spending to support infrastructure development.

The total outlay for infrastructure announced in the budget for 2016-17 is Rs2.21 trillion compared with Rs1.80 trillion in revised estimates for 2015-16. With NDAs focus on improving the country's transportation architecture, Rs2.18 trillion has been earmarked for roads and railways for the financial year 2016-17.

With tepid private investment due to a slowdown in emerging and developed markets coupled with weak domestic earnings by companies, public spending was required to keep the momentum going. However, the dilemma faced by the government was how to balance the spending and stick to the fiscal deficit targets of 3.5% of the gross domestic product (GDP) for 2015-16 and 3.9% for 2016-17.


The government decided to stick to the targets while creating space for infrastructure spending.

“We wish to enhance expenditure in the farm and rural sector, the social sector, the infrastructure sector and provide for recapitalization of the banks. This will address those sectors which need immediate attention,” Jaitley announced while laying the roadmap for the third year of Prime Minister Narendra Modi led government.

The Union budget proposed a capital expenditure of Rs1.21 trillion for the railways. This will support the national carrier which has mostly relied on monetising its assets and funding projects through external financing, as announced by the railway minister Suresh Prabhu on 25 February.

The government also earmarked Rs27,000 crore for Pradhan Mantri Gram Sadak Yojna and

Rs55,000 crore for roads and highways. Additionally, Rs15,000 crore is to be raised through bonds issued by National Highways Authority of India (NHAI).

“Our goal is to advance the completion target of the programme from 2021 to 2019 and connect the remaining 65,000 eligible habitations by constructing 2.23 lakh km of roads,” Jaitley said.

He also announced that contracts for constructing nearly 10,000km of national highways will be awarded in 2016-17.In addition, around 50,000km of state highways will be upgraded as national highways.

This allocation towards physical infrastructure projects comes in the backdrop of twin balance sheet problem as articulated by the Economic Survey—the stressed financial positions of staterun banks and some business houses.

Experts agree with the government’s strategy.

“Given the fiscal deficit constraint, I think the numbers for infrastructure announced today look good. There has been a hike of 20-30% in capital expenditure,” said Abhaya Agarwal, partner and public private partnership leader, EY.

Agarwal added that too much capital expenditure at one shot is not desirable given that one may end up investing in projects not worthy enough and lose market value.

An analysis of December quarter results of all staterun bank by news agency Press Trust of India shows that the cumulative gross nonperforming assets of 24 listed public sector banks, including market leader State Bank of India and its associates, stood at Rs3.93 trillion as on 31 December 2015.

As part of the comprehensive infrastructure development plan, the budget also focused on developing ports and airports.

“We are planning to develop new greenfield ports both in the eastern and western coasts of the country. The work on the National Waterways is also being expedited and Rs800 crore has been provided for these initiatives,” said Jaitley, while adding that the Airport Authority of India will revive the unutilised and underutilised airstrips across the country in partnership with state governments.

To provide further impetus to mobilise funds for infrastructure spending, a total of Rs31,300 crore will be allowed to be raised through bonds issued by NHAI, Power Finance Corp. Ltd, Rural Electrification Corp. Ltd and Inland Water Authority, among others.

Making public private partnership (PPP) as its pivot to attract private sector investment, the budget announced the government’s intent is to introduce a Public Utility (Resolution of Disputes) Bill and also guidelines for renegotiation of PPP concession contracts.

“A new credit rating system for infrastructure projects which gives emphasis to various inbuilt

credit enhancement structures will be developed, instead of relying upon a standard perception of risk which often results in mispriced loans,” Jaitley said.

Infrastructure development is necessary for realising a GDP growth of 7-7.5% for the next fiscal as projected by the Economic Survey released on 26 February. The Survey added that India could achieve a growth rate of 8-10% going forward.

“The government spending capacity cannot be increased overnight. So, taking into account other related announcements for ease of doing business and resolve to implement goods and services tax, the infrastructure sector is poised to gain,” said EY’s Agarwal.

Sun Capital Advisory Service

Two downgrades a day put India Inc in trouble

Suncapital: At two downgrades a day, the quality of India Inc’s debt is fast deteriorating. Thanks to160 downward revisions in the last two months alone, the tally since April 2015 has crossed 655 companies; metals, power, construction and infrastructure players lead the pack. And between January and now, rating agencies have made at least 13 revisions across seven state-owned lenders.

Jindal Steel and Power(JSPL), which owes lenders Rs 42,000 crore, is now rated below investment grade by CRISIL with the firm’s long and short-term credit rating now down by three to four notches. In mid-February, Moody’s lowered the long-term corporate family rating of Tata Steel by two notches to Ba3; soon thereafter, S&P revised downwards the grade of Vedanta Resources’ long-term foreign issuer credit rating to B, the fourth time this fiscal, citing increased pressure on liquidity as the firm attempts to refinance $1.35 billion of borrowings.

Moody’s lowered its outlook on Delhi International Airport Private Ltd’s Ba1 corporate family rating and senior secured ratings to ‘negative’, citing the impact of a new tariff order by the Airports Economic Regulatory Authority (AERA). It estimated that the new tariff guideline, applicable over 2016-2019, will lead to a decrease in annual aeronautical revenues by about R2,000 crore, or around 70%, from FY17 onwards. Among others for whom the outlook has been lowered to ‘negative’ are BHEL, DLF, Lodha Developers, Tata Tele Services and Shree Renuka Sugars.

As many as 16 sugar companies and 22 textile-linked companies have also seen rating revisions, as have several key infrastructure projects based on tariff changes or lower traffic volumes.

Given the dire situation that the steel sector is in, it’s not surprising that as many as 20 steel-producing and processing companies have been downgraded to ‘D’ or default rating in FY16 so far, according to Bloomberg data. The proportion of corporate debt owed by stressed companies, defined as those whose earnings are insufficient to cover their interest obligations, has increased to 41% in December, 2015, up from 35% in December 2014.

ICRA revised its outlook on the long-term rating of Mumbai Metro One, a special purpose vehicle (SPV) of Reliance Infrastructure, with two other entities, from stable to negative citing the shortfall in cash flow position of the project, resulting from lower than estimated actual daily passenger volume.

CRISIL Ratings identifies two clear trends in credit quality that have emerged over the past one year. The debt-weighted credit ratio, or the ratio of quantum of debt upgraded to that downgraded, is at its lowest level in nearly three years. This is because some large corporates — whose fortunes are linked to commodity and investment cycles — or those which are highly leveraged, remain stressed. What’s positive is that several mid-sized and smaller firms have seen an improvement in credit quality, with upgrades higher than downgrades, and the credit ratio touching a four-year high in the first half of fiscal 2015-16.

However, as demand slow-down and leveraged balance sheets of some Indian corporates limit their spending capacity, the cascading impact may not be ruled out even on smaller companies.

In a recent interaction , Bharat Iyer, MD & Head of Research at JP Morgan, pointed out that the de-leveraging cycle is taking longer in the absence of a revival in earnings and the inability of companies to raise equity. Which is why although the NPL cycle looks like it’s closer to the bottom, it could be some time away from turning. “Apart from sectors such as real estate, infrastructure and resources, there is also stress in the SMEs linked to these sectors,” Iyer added.

CRISIL had downgraded debt worth R2.4 lakh crore in the six months to September with the the debt-weighted credit ratio for a set of 1,441 companies — for which ratings were altered — falling to 0.27 times. For FY15, this ratio stood at 0.62 times. For FY16, a further deterioration in the gauge cannot be ruled out as companies struggle to make ends meet.

The metals and mining was clearly the worst affected space given that almost a quarter of default ratings belonged to such entities.

Ratings plunge

* Ratings for 655 firms downgraded since April 2015

* JSPL rated below investment grade, owes lenders R42,000 crore

* Tata Steel downgraded two notches to Ba3 by Moody’s

* Vedanta Resources downgraded by S&P to B

* Dial’s outlook lowered to ‘negative’ by Moody’s

* Outlook for BHEL, DLF, Lodha, TTSL, Shree Renuka Sugars lowered to ‘negative’

* 13 revisions for seven PSBs since January

Sun Capital Advisory Services

Indiabulls Real Estate Fund invests Rs125 cr in Mumbai project

Suncapital.co.in: With this deal, the fund has deployed almost 90% of its capital; remaining Rs50 crore to be deployed through another transaction

Indiabulls Real Estate Fund (IREF) has invested Rs.125 crore in an upcoming residential project in south Mumbai, its fourth transaction from the fund.

IREF, the first of the several real estate-focused funds managed by Indiabulls Asset Management Co. Ltd, made the investment in the form of structured debt in a project by the Shree Naman Group. With this, the fund has deployed almost 90% of its capital. It has invested Rs.100 crore each in projects of Supertech Ltd and Vatika Group in the National Capital Region (NCR) and Rs.125 crore in Sheth Creators Pvt. Ltd’s project in Mumbai during the course of last year, after launching its fund in February 2015.

The remaining Rs.50 crore will be deployed through another transaction. In line with its proposed strategy, IREF has invested in approved, under-construction and upcoming residential projects with visible sales, primarily in key property markets.

The investments have been done via the non-convertible debentures (NCDs) route.

“It was a successful first attempt by the fund. In 2016, deployment of capital by fund managers like us will be done with a little more caution. Cost of borrowing of developers have come down with a lot of liquidity in the market and there is a lot of pressure to deploy, but we will invest carefully,” said Ambar Maheshwari, chief executive– private equity, Indiabulls Asset Management Co. Ltd.

Jayesh Shah, chairman of Sree Naman Group, confirmed raising debt for an upcoming project and said the money will be used for project development.

In a month’s time or so, IREF plans to launch a second fund to raise another Rs.500 crore from domestic investors to invest in residential projects this year.

In the last couple of years, India’s real estate sector has witnessed a steady fall in home sales and a rise in unsold inventory.

Private equity (PE) funds and non-banking financial companies (NBFCs) have come to the rescue of many developers who needed capital to refinance loans, kick off projects or for last mile financing for ongoing projects.

“While there are ample investment opportunities in real estate, our measured and calibrated investment strategy of choosing top developers and their quality under-construction projects, has worked and will result in superior returns for our investors,” said Akshay Gupta, group executive head and chief executive officer, Indiabulls Asset Management Co. Ltd.

In 2015, PE funds invested nearly $2.77 billion in real estate projects and companies across 81 deals against $2.1 billion in 2014 through 90 deals, according to data from VCCEdge, which tracks investments. Demand for capital among developers continues to remain high this year as well.

“Fund-raising and deployment are both challenging in tough times. Fund-raising process for most funds has become a longer process as investors carry out a more rigorous due diligence process before committing capital,” said Shashank Jain, partner, transaction services, Pricewaterho\useCoopers India. “Deploying is tough because funds need to choose the best projects and developers, when they give out money when the sector is going through a rough patch.”

by Suncapital.co.in