11.10.2010

Politics & the Nation
  • Know what is a ‘Blue Alert’?
    • It is what is issued by the Enforcement Directorate against individuals who are being investigated by it.  The idea is that they do not leave the country.  Usually the passport of such persons is impounded to prevent them from leaving the country.
  • World Bank to investigate road safety in India
    • Alarmed by the increasing number of road accident deaths in India — the highest in the world at 1.18 lakh — World Bank has decided to carry safety investigations on 3,000-km of state and national highways and fund retro-fitting to make them safer.
    • Global Road Safety Facility (GRSF), which is anchored in the World Bank, will contract out the project to International Road Assessment Programme or iRAP. The project budget is close to $8 million and will cover highways in eight states, including Andhra Pradesh, Karnataka, Gujarat and Assam. iRAP will videograph state and national highways and investigate different road safety aspects, including road engineering features like curvature of road, pedestrian safety features and road signages. iRAP would then recommend how to retro-fit these highways to improve their safety quotient.
    • Over the past three years, India has attained the dubious distinction of having the most number of road accident deaths in the world. Earlier, China topped the chart. However, after conscious efforts at increasing safety awareness amongst motorists China has reduced road fatalities. On the other hand, India has failed to make any mark.
  • Karnataka Governor's role comes in for scrutiny before the trust vote today
    • The Karnataka Governor HR Bharadwaj has reportedly written to the Speaker of the assembly asking him to maintain status quo in the House strength as on October 6 before the dissident MLAs withdrew support, reducing the government to a minority.
    • The BJP has been banking on the possibility of disqualifying the dissident MLAs.  With the Governor's reported move, that is no longer an option for the BJP.
    • But the Governor's move has come in for criticism.  
    • The Speaker has also taken a strong exception to the governor’s letter and said that he did not have any authority to interfere in these matters. It remains to be seen how the ruling party would be conducting the proceedings today, as it is still planning its strategies.
    • As things stands today, in the 224 member assembly, BJP has 117 seats, followed by Congress at 73, Janata Dal (Secular) 28 and independents six. However, these numbers are unlikely to give any clear picture as around 18-19 BJP MLAs have openly aligned with Janata Dal (Secular) leader Mr H D Kumaraswamy.
  • What is Generation Y?
    • Generation Y or Gen Y refers to the generation that is born at the dawn of the country's economic liberalisation.  Raised in a connected digital world, and often spoilt for choice, this generation is now recognized to be a major driving force at the workplace.  Coupled with the fact that Gen Y will also produce the leaders of tomorrow, it’s clear that senior managers need to be clear — and perhaps careful — about how they handle these youngsters.
Finance & Economy
  • Our state of the economy
    • Take a look at this graphic.  Good one.  Gives us a bird’s eye view of the various forecasts.
  • Cairn hopes to close the Vedanta deal soon
    • Bill Gammel, the CEO of Cairn India is hopeful that the deal with Vedanta will be approved soon.
    • He now says that the company ought to have approached / informed the Government and the ONGC first before making the deal public.  With the deal once having gone public, the company initially took the line that it does not need government approval.  
    • But this stand, it appears to have reversed now.  The Cairn CEO is apologizing publicly for the gaffe and he is also saying that the Government approval is needed.
    • Petroleum ministry officials have indicated that they want Cairn and Vedanta to change the terms of the PSC, which was signed in the late 1990s casting the burden of paying royalty, a tax paid to state gov-ernment, on ONGC even though the latter owns 30% of the JV. The government wants the new owner, Vedanta, to agree to pay royalty.
  • Stricter ECB rules proposed for escrow a/cs
    • The banking regulator has questioned deals that foreign investors often strike with Indian companies to protect their money.
    • An arrangement where local firms and promoters keep aside assets that can be sold from a special account (escrow account) to buy out the overseas party, gives foreign investors a chance to salvage their investment and exit if the local firm fails to perform or meet certain conditions.
    • Here, the foreign investor, which can be a private equity player, may enjoy the right to sell its stake to the local promoter. Once the foreign investor exercises such a right (or, put option in investment parlance), the Indian promoter can arrange the funds by selling assets in the escrow account.
    • But such an agreement, feels RBI, creates an interest on domestic assets in favour of non-residents, which is similar to an offshore bank lending against shares or land in India -- transactions that violate foreign exchange regulations.
    • An agent is appointed by the local party and is entrusted with the job of liquidating the assets at the company's direction.
    • According to legal minds and consultants who help in structuring such inbound deals, there are two distinct issues involved. First, whether foreign investors can have put options; second, is an escrow mechanism against the law?
    • Many foreign investors insist on the escrow mechanism because of the bitter experience they had when a few local parties refused to honour the option and buy back the shares.
    • The central bank is clear that foreign direct investment can be in the form of either plain equity or compulsorily convertible debentures or compulsorily convertible preference shares. And, if there is a put option attached to any of these instruments, then the investment takes the nature of debt' and not equity'. Such investments, said an RBI official, should be governed by the more restrictive rules on external commercial borrowings (or, foreign loans), and not FDI.
  • Developments on the MCX-SX and SEBI spat
    • We have noted in our blog earlier on the MCX SX and SEBI spat over allowing the exchange to set up trading platforms for equity, interest rate derivatives and bonds.
    • SEBI rejected the application filed by MCX SX, citing non-compliance with shareholding rules, withholding of material information, concentration of 'economic interest' and 'illegal' buyback transactions with investors.
    • Therefore MCX SX approached the Government of India against the SEBI decision and sought intervention under Section 16 of the SEBI Act.
    • The central government can give directions to the market regulator under the Section 16 of the Sebi Act, but such directions can only relate to policy issues. However, any decision on whether an issue relates to policy or not rests with the government, effectively giving it handle to intervene in any issue.
    • The Government has reportedly refused to intervene in the issue as it felt that SEBI is well within its powers to reject an application.  
    • Market regulator Sebi’s concerns are largely around the issue of MIMPS, or Manner of Increasing and Maintaining Public Shareholding in Stock Exchanges norms. According to these norms no single share holder can hold more than 5% in stock exchanges. A select class of financial institutions, however, can own up to a maximum of 15%.
    • Financial Technologies and MCX hold 5% each MCX SX, although it is alleged that they hold warrants that control more than 61.9% economic interest in the exchange.
  • SMEs take a liking to LLPs, large cos stay away due to tax ambiguity
    • Smaller companies in computer services, real estate and trade activities are embracing the limited liability partnership structure in a big way, while large professional firms are staying away due to a lack of regulatory clarity on issues such as stamp duty and taxation.
    • LLP, a form of business organisation that combines the benefits of partnership and limited structures, provide firms with greater flexibility in functioning and requires much less compliance leading to large saving on operational costs.
    • Although the government enabled setting up of LLPs in April 2009, it did not receive a good response with barely 700 such companies registered till February this year. Since then a large number of firms adopted the business model, taking the number of LLPs to 2,500, nearly five times of what it was at the starting of 2010. Consultancy and advisory sector led the sector-wise list of 2,414 LLPs registered in India, according to government data.
    • Business consultancy and advisory services is the single largest sector in terms of the number of LLPs registered, with 715 entities across the four regions in the country.
    • The ministry of corporate affairs, through its regulatory bodies like Institute of Company Secretaries of India (ICSI) have been reaching out to the SME segment asking them to adopt the LLP structure, giving them easy access to resources apart from the advantage of operational flexibility.
  • Capital flows and tackling the associated problems
    • Take a look at this op-ed.  Makes an interesting reading.
    • Some excerpts for our keeps:
    • The scale of capital flows into the Asian emerging markets is already exceeding that seen at the peak of the previous cycle in 2006-07 by about 60%. Capital is heading Asia’s way, whether it wants it or not and it is time central banks find judicious ways to tame the impending volatility without threatening the broader economy.
    • So, what are the tools deployed by India to efficiently manage the forex inflows?
      • India has an arsenal of non-tariff-type barriers to foreign inflows in the form of limits on foreign holdings of rupee-designated debt paper, controls on external commercial borrowings, sector-specific limits and in some cases, prior approvals on foreign holdings in the equity capital of Indian companies. In addition, foreign investors are required to deal with high levels of uncertainty relating to several unsettled issues in tax administration and bureaucratic controls on foreign investor access, etc.
      • In times of burgeoning inflows in the past, the security market regulator has tweaked regulations relating to participatory notes to moderate such flows. The recent measures at tightening the registration process by denying access to foreign institutional investors and subaccounts that have not met with the expected transparency standards relating to their holding structure can be seen as yet another measure to not only clean up the system but also to moderate inflows.
    • What is Tobin tax?  It is being suggested as a measure to counter unwarranted inflows of forex.  
      • Tobin tax, suggested by the Nobel laureate economist, James Tobin, envisages a tax on foreign exchange transactions to cushion exchange rate fluctuations by levying a penalty on short-term financial round trips into another currency. In a more generic form, this could be a tax on financial transactions to curb short-term speculative trades and to encourage long-term investments. However, such taxes can have the effect of raising the cost of allocating capital, thus reducing the efficiency of financial intermediation and causing distortions in the functioning of financial markets.
    • The impossible trinity revisited again:
      • At nearly $300 billion, India has more than adequate forex reserves and therefore in an ideal situation, foreign capital inflows should roughly match the current account deficit. In addition to India’s attractiveness as an investment destination, forex inflows into India are influenced by the prevailing investment climate elsewhere in the world. As inflows mount, the rupee appreciates, or if the exchange rate is kept stable to help exporters, forex reserves accumulate.
      • The rupees released to the system while accumulating forex reserves would lead to increased levels of inflation. To curb this, interest rates would need to be raised, which in turn could attract even more capital flows. Sterilisation of the excess rupee liquidity is another option, but this requires the banking system to be willing to hold the additional supply of low-yielding government bonds. This also involves a cost to the state on account of the negative carry between the yield on its forex assets and the interest rate on the sterilisation bonds.
TechnologyInternational
  • India, China defend right to up farm duties
    • India and some other developing countries have rejected a proposal to restrict their ability to impose stiff duties to protect farmers in the case of sudden surges in imports of farm goods at the ongoing talks for opening up global trade in goods and services.
    • The proposal came from Costa Rica and was backed by big exporters of farm produce such as Australia and Thailand.
    • The agenda of the contentious and stalled Doha Round of the WTO includes creation of a special safeguard mechanism, or SSM, for use in the case of sudden increase in imports or drop in prices, essentially allowing developing countries to temporarily increase their Customs duties over and above the ceiling rates.
    • Big agricultural producers fear the proposal could reduce their exports opportunities.
    • But the hard line taken by India, China and other members of the G-33 puts more pressure on the WTO committee on agriculture struggling to strike a compromise between members taking opposing stands on the issue of special safeguard mechanism, or SSM.
    • One of the reasons the negotiations on the ongoing Doha round grinded to a halt at the last meeting of WTO trade ministers in July 2008 was disagreement between India and the US over SSMs.  The differences largely relate to the price trigger for the use of these safeguard measures.
  • Heard of the Solow model?
    • It refers to the growth model depicted by Robert Solow in the late 1950's.
    • It was his research that demonstrated that as much as 87% of economic growth in the US between 1909 and 1949 was due to an “unspecified factor or residual”, characterised as technological change. The Solow model showed that the vast bulk of growth is due to “advances in knowledge” and not quite due to additional inputs of the traditional factors of production like land, labour and capital. The basic results have been replicated for other economies in umpteen other studies, and Solow subsequently won the Nobel.
    • Yet, the growth theory that he pioneered did have a recurring shortcoming in that it assumed technological change as an exogenous read stand-alone factor. And the thought leaders have since been focused on identifying specific attributes of technological change: innovation in products, processes and whole organisational forms.
  • Surging capital inflows into the emerging markets is the talk of the town everywhere now.  Are there any risks to this 'capital flows' story?
    • If you read this long article from Ruchir Sharma, you will get a good grip over the story.  Some risks as analysed by him are as follows:
    • The biggest of the risks is inflation, arising out of the difficulty in directing liquidity away from finding a wrong home.  Recent examples include the oil price bubble in the first half of 2008 and traces of an echo bubble in some commodity and property prices in late 2009 and early 2010. Policymakers in emerging markets were forced to respond to such misbehaviour, especially in China that needed to crack down on the local property market earlier this year.
    • The 30% surge in agricultural-based commodity prices over the past quarter is seriously worrisome given the high weight of food in the emerging market consumer’s basket. Core inflation in many developing countries has anyway been inching higher and — at nearly 4% currently — is already at levels similar to the later stages of the previous boom.
    • Another potential blow to capital flows is a sovereign debt problem in one of the bigger European nations. Spreads on Greek, Irish and Portuguese debt continue to widen but the market has been able to largely ignore this of late because the size of these economies is relatively small at around $300 billion each. But a more pronounced effect on risk appetite and capital flows is possible if the situation in a trillion-dollar economy such as Spain, which too has terrible debt dynamics, begins to spin out of control.
  • Some interesting statistics
    • Americans constitute 5% of the world’s population but consume 24% of the world’s energy. Americans spend a staggering $2.5 trillion on healthcare every year (2.5 times India’s GDP), 60 million American kids (under 14 years) buy toys worth $33 billion annually, an estimated 65% of US adults are overweight or obese leading to an annual loss of 3,00,000 lives and at least $130 billion in healthcare cost.
    • As per the Federal Reserve’s website, the current consumer credit outstanding is approximately $2.4 trillion, or about $21,239 per household.
Sport
  • BCCI terminates Rajasthan Royals and Kings XI Punjab IPL contracts
    • In a surprise move, the BCCI has terminated the agreements sending the IPL into a tailspin.
    • It said it is terminating the contract because of breach of contract with the BCCI.   
    • Rajasthan Royals and Kings XI Punjab, both seen to be close to the board’s embattled former official Lalit Modi, have participated in all the three editions of the tournament. Royals won the inaugural edition of IPL, which has since grown to be a formidable sporting property and marketing platform.
    • Both teams were found guilty by the board of transferring the ownership after the franchise was awarded, which is against contractual norms. In the case of Rajasthan Royals, the person said, the board has still been unable to identify the real owner of the team from the documents provided. Both teams were found to be in violation of a clause in the eligibility criteria, which stipulated that teams could not change ownership within three years of being awarded the franchise.
Language Lessons
  • sangfroid: Noun
    • Great coolness and composure under strain
    • eg: "keep your sang-froid”
  • Schadenfreude: Noun
    • Delight in another person's misfortune
  • mojo: Noun
    • A magic power or magic spell
  • souffle: Noun
    • A murmuring or blowing sound; Light fluffy dish of egg yolks and stiffly beaten egg whites mixed with e.g. cheese, fish or fruit

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