20.06.2007

• Irritants in Indo-Russian defence deals
• Russia had been a reliable defence supplier to India for quite long. But of late, the strongly cemented relationship seems to be going through some rough patches.
• Russia, though has not yet reneged on its commitment to supply India with the aircraft carrier – Admiral Gorshkov, it is making things appear that its delivery cannot be taken for granted by India. Though planned to be delivered to India by August 2008, it now says that the delivery is possible only around 2010.
• Secondly, it has also sought a review of the current defence contracts demanding millions of dollars claiming a drop in value of the dollar. It has threatened to foreclose the Su-30 MKI deal after the delivery of the first 100 fighters claiming cost escalation. Under the $8.5 bn deal, Moscow has so far supplied 60 fighters and said it was willing to supply 40 more at the current cost escalation of 2.5%.
• Bank mergers may become difficult
• While the finance minister wants consolidation to happen in the banking industry, difficulties seem to lie ahead.
• Existing rules stipulate that M&A activity leading to the formation of an entity with assets more than Rs. 1000 crores or turnover of more than Rs. 3000 crores will need the CCI’s nod.
• While the RBI looks into specific operational requirements relevant to the banking sector in a merger and acquisition, the CCI (Competition Commission of India) would look at it from the point of view of protecting a consumer.
• The existing rules don’t exempt the banks from the purview of the CCI. But any small bank’s merger with another is bound to bring about an entity with more than Rs. 1000 crores in assets or a turnover of Rs. 3000 crores or more. So the Department of Economic Affairs is making a strong case for such exclusion. But the ministry of corporate affairs is strongly opposing such a move.
• Do you know how much do our cell companies earn from foreign roamers coming to India?
• Rs. 3000 crores (Estimated for current year)
• Can you expect commodities also to follow anti-terror norms?
• Yes, says US and the world follows.
• In the wake of 9/11, all imports, especially of food items, were coded by the US customs. Subsequently, the C-TPAT (Customs-Trade Partnership Against Terrorism) norms were formulated and the US importers of spices were held responsible for checking them out with their suppliers all over the world. Once in a way, the US importer was also asked to audit the supplier in, say, India by checking out whether the supplier had CCTV to monitor operations. This was to pre-empt the stuffing of containers with harmful substances.
• Diamond bourse may be in place by this Diwali in India
• Bharat Diamond Bourse is expected to start operations at the Bandra-Kurla complex in Mumbai.
• The objective of establishing this bourse (exchange) is to provide infrastructure and other facilities in India for domestic and overseas buyers and sellers of diamonds.
• Often I used to wonder as to how Antwerp, the Belgian city became a strong diamond trading hub of the world, when the diamonds were basically mined in Africa. Is it too early to say that we are maturing slowly to challenge the hegemony of established markets? The jury is still out on this.
• Some basic lessons about ‘Letter of Credit’ (LC)
• The Commerce students amongst you know this already. It is for those who are from non-commerce backgrounds.
• An LC is taken by a foreign buyer from his bank and it says that the buyer has the capacity to pay for the goods being imported by him and that in the eventuality that he doesn’t pay, the bank would make good the loss to the exporter.
• The number of LCs Indian suppliers have received has grown just by 5% between 2004 and 2006, while the exports have grown by more than 25%. This shows that the LCs are fast losing their popularity.
• More Indian exporters are dealing with their foreign buyers on ‘open account’ basis. In this the buyer does not furnish any LC and the supplier ends up taking all the risk of buyer not paying up or paying too late.
• How are they able to do it? Enter credit derivatives. When banks come upon Indian suppliers trading with a financially weak buyer, they make the payment to the supplier at a discount – say 6.5 to 7.5% and enter into a credit default swap (an insurance against default on loan) with another bank to transfer the risk. So the supplier gets him money without any delay and the bank makes money on intermediation.
• Had I started explaining to you what a credit derivative is or what a credit default swap is, it would have been more difficult. But today’s article in Money & Banking section explained it so succinctly that I couldn’t desist from giving you an excerpt of it.