13.10.2010

Politics & the Nation

• India elected to UN Security Council after 19 years
• After a gap of 19 years, India was on Tuesday elected as a non-permanent member of the UN Security Council (UNSC), a position which would help it push more aggressively for the reform of the world body’s top organ.
• India, which is a founding member of the UN, has been on the Council six times earlier, but not since 1992.
• In 1996, India lost to Japan by a huge margin of 100 votes. This time, however, it is taking over the Asia seat from Japan, being the sole candidate from the region in the race as Kazakhstan pulled out earlier this year.
• In February, India’s candidature was endorsed by the Asian Group but it still had to get support of 128 countries, two-thirds of the 192 members of the UN General Assembly.
• Other “clean slate” candidates included South Africa that got the Africa seat replacing Uganda with the vote of 182 members in its favour, and Colombia, which secured the seat for the Group of Latin American and Caribbean States, replacing Mexico.
• The elected members take their spots on January 1, 2011 and will serve for two years.
• The five new countries will be replacing Austria, Japan, Mexico, Turkey and Uganda. The two seats for Western Europe and Others Group were fought for by Canada, Germany and Portugal.
• India, which is among the three largest troop contributing countries to the UN, has already highlighted the significance of all the BRIC nations (Brazil, Russia, India and China) being on the Council together, which could present a united front on several contentious international issues.
• It has also underlined that the IBSA (India, Brazil and South Africa) will also be on the Council together.

Finance & Economy

• CIL set to make history with Rs. 15,200-cr IPO
• Coal India Limited, is coming out with an IPO -- divesting 10% of its stock to public.  The issue has a price band of Rs. 225 to 245 per share and once completed, it will be the biggest IPO in India so far.  Before this, it was Reliance Power which in 2008 raised about Rs. 11,600 crores.
• If the issue is priced at the top end, it could make it the seventh most-valuable firm in the country with a market capitalisation of $34 billion, behind state-run utility NTPC.
• The share sale would be investors’ vote on the Manmohan Singh government’s economic policies. The Centre plans to raise Rs. 40,000 crore this year from sale of shares in state-run companies, of which about 5% has been achieved so far. Global investors have poured more than $22 billion in the Indian stock market, making it one of the best performers in the region as economic growth sustains at more than 8%.
• Coal India, with an output of 431 million tonnes a year, would be the world’s biggest listed coal producer. Its coal reserves are also the largest in the world with 10.6 billion tonnes compared with Peabody’s 9.3 billion tonnes and China’s Shenhua’s 7.4 billion tonnes.
• India Inc Top 5’s dilemma over Rs. 40k cr treasure chest
• India's scheduled move to adopt IFRS (International Financial Reporting Standards) from April 1, 2011 is posing a Rs. 40,000 crore dilemma for its top five companies.  The dilemma is about the treasury stock they currently hold.
• Treasury stock arises when a company merges a subsidiary into itself. For instance, Reliance Industries Limited (RIL), through four of its subsidiaries, held 46% stake in IPCL. When IPCL merged into RIL, all IPCL shareholders got RIL shares. RIL, being a shareholder through its subsidiaries, got its own shares. In most developed markets like the US and the UK, companies extinguish their treasury stock on allotment itself. This has the effect of reducing a company’s equity, thus boosting its earnings per share (EPS). Theoretically, this should increase shareholder wealth.
• But several Indian companies have chosen to hold treasury stock. Promoters might want greater control over their stock or might feel their stock is undervalued. Or, they might want to sell treasury stock, boost their profit number, and use it to pay dividends or fund expansion.
• IFRS closes the profit and dividend-payout window.  Under the new accounting architecture, companies can’t show the sale proceeds of treasury stock as income. If they can’t recognise it as income, they can’t add it to profits. If they can’t add it to profits, they can’t distribute it as dividends.
• In other words, such a transaction bypasses the profit and loss (P&L) account. The change gets reflected only in the balance sheet, with an increase in reserves. Thus, the sales proceeds can be used for expansion, but not to pay dividends. This reduces the incentive for companies to hold treasury stock with the intention of profiting from it.
• Liquidation of treasury shares eliminates the speculative effort of holding the stock. That’s what the IFRS achieves.
• If these companies (Reliance Industries, Mahindra & Mahindra, BPL, Jaiprakash Associates and United Spirits) decide to offload the stock to the markets, such offloading would equal to about 8.7% of their total market capitalisation.
• Indian companies will shift to IFRS in four phases. In the first phase, from April 2011, IFRS will be mandatory for companies with a net worth of above Rs. 1,000 crore, those listed overseas, and those in the BSE Sensex and NSE Nifty. That’s about 1,200-1,300 companies. In the second phase, from April 2012, it will be mandatory for banks and insurance companies. In the third phase, from April 2013, companies with a net worth of Rs. 500- Rs. 1,000 crore. In the fourth phase, April 2014, for companies with a net worth of less than Rs. 500 crore.
• The Institute of Chartered Accountants of India (ICAI), which is responsible for aligning local accounting standards with IFRS, has released 37 IFRS-compliant accounting standards. Only one standard relating to insurance companies is pending, for which ICAI is consulting with the insurance regulator.
• Even if IFRS is introduced, it’s unlikely the last would have been heard about treasury stock. In India, treasury stock is a grey area. The Companies Act, 1956, does not allow a company to holds its own shares, either directly or indirectly through a subsidiary. Yet, companies do.
• Some companies hold treasury stock in a trust. The trust, typically, belongs to a subsidiary of the parent company. Reportedly, it is a clear violation of the Companies Act.
• Industrial growth slumps to 5.6%
• The country's industrial output growth plummeted to a 14-month low in August, much below analysts’ estimates, indicating a possible slowdown in growth momentum.
• The widely tracked index of industrial production for the month rose 5.6%, sharply lower from an upwardly revised 15.2% in July, as the volatile index of capital goods contracted by a massive 41%.
• The lower-than-expected IIP number for the month could put pressure on the Reserve Bank of India’s monetary tightening plans, despite sticky inflation numbers. Food inflation stood at 16.24% in the week ended September 25. Most analysts, however, expect the central bank to raise rates further.
• The large swings in the IIP numbers are mostly due to the volatile capital goods index that has about 10% weight in the index. The index for capital goods contracted 2.6% in August from a year ago after expanding 72% in July.
• All clear for super-regulator, RBI governor to get key post
• The government will soon form the Financial Stability and Development Council, or FSDC, after it managed to bring on board regulators in the financial sector by addressing their key concerns, especially those of the Reserve Bank of India.
• At a meeting chaired by finance minister Pranab Mukherjee on Tuesday and attended by all the regulatory heads, it was decided that a sub-committee of the Council, which will have the mandate to look after financial stability and inter-regulatory coordination, would be headed by the RBI governor. The central bank had objected to the initial proposal of the finance ministry to assign the task to the finance secretary. The securities market regulator, Sebi, too had told the government that the Council should restrict itself to issues relating to financial stability.
• The government appears to have reworked the architecture of the proposed council to ensure that the central bank was on board without undue dilution of the agenda of the FSDC.
• The Reserve Bank of India governor-headed subcommittee would be the first stop for sorting out any conflict between the regulators, thus addressing concerns that the council could undermine the autonomy of regulators. All regulators will be represented on the sub-committee with senior finance ministry officials as members and the RBI governor as the chairman, similar to the structure of the existing High Level Coordination Committee on Financial Markets.
• The original consultation paper had proposed two sub-committees, one on stability-- financial sector stability committee to be headed by finance secretary with all regulators as members and another one the financial sector regulatory coordination committee headed by RBI governor.
• Excerpts from Joseph Stiglitz's op-ed that are worth our attention:
• Central banks are better at restraining markets’ irrational exuberance in a bubble — restricting the availability of credit or raising interest rates to rein in the economy — than at promoting investment in a recession. That is why good monetary policy aims to prevent bubbles from arising.
• In 2001, lowering interest rates seemed to work, but not the way it was supposed to. Rather than spurring investment in plant and equipment, low interest rates inflated a real-estate bubble. This enabled a consumption binge, which meant that debt was created without a corresponding asset, and encouraged excessive investment in real estate, resulting in excess capacity that will take years to eliminate.

Language Lessons

• bedlam: Noun
• A state of extreme confusion and disorder
• hullabaloo: Noun
• Disturbance usually in protest
• snot: Noun
• A person regarded as arrogant and annoying; nasal mucus