22.12.2010

Politics & the Nation

• India, Russia consolidate their defence ties
• India and Russia on Tuesday consolidated their defence ties by firming up plans to jointly design and manufacture Fifth Generation Fighter Aircraft (FGFA). With each FGFA costing around $100 million, and IAF planning to induct 300 of them from 2017-18, the deal will be worth $30 billion.
• The fighter jet, whose joint production was agreed on in 2007, is intended to compete with the US F-22 Raptor and the under production F-35 Lightning II.
• The project will be jointly developed by the Hindustan Aeronautics Limited of India and the Sukhoi Design Bureau and Rosoboron export of Russia.
• The agreement, along with 29 other India-Russian pacts, was signed after talks here between Prime Minister Manmohan Singh and President Dmitry Medvedev, who is here on a two-day visit.
• Further India and Russia have arrived at a framework agreement which will allow construction of two additional generating units at Kudankulam, a nuclear power plant in the southern Indian state of Tamil Nadu where Russia is already setting up two reactors. While first unit will be commissioned by the month-end or early next month, the second unit will be commissioned by the next year-end.
• Other agreements pertained to simplification of visa procedures for certain categories, including businessmen, enhancement of cooperation in oil and gas sector, MoU for cooperation in the pharmaceutical sector, MoU on combating irregular migration and agreement on cooperation in the field of emergency management.

Finance & Economy

• Why are ARCs faring badly?
• Remember Asset Reconstruction Companies?  These are the foster children of the SARFAESI Act.  The ARCs were formed with the idea that they would buy bad debt from creditors, consolidate them and make a profit by realising value from the loans either through recovery or sale of assets.
• But recent years have been frustrating times for ARCs. Many ARCs have experienced situations where they have been asked to bid by banks which place a large chunk of their bad loans on the block. But auction after auction, the bank, after receiving a large number of bids, cancels the sale on the grounds that there is a large gap between the price offered by ARCs and the bank’s expectation — the bank, however, never discloses the price. ARCs cynically see this as an exercise by banks to gauge the market value of their distressed assets. As a result, the relationship between banks and ARCs is no longer the same.
• Also, what makes the matter worse for ARCs is a dwindling liquidity.
• As of March 2010, the banking system was sitting on bad loans to the tune of Rs. 1.21 lakh crore. Of this, ARCs purchased just about Rs. 1,500 crore of NPAs from banks.
• The Reserve Bank of India (RBI) has issued 13 ARC licences so far, but merely half a dozen are active players.
• Security receipts (SRs) do not give banks much comfort. Banks need to mark-to-market the SRs and need to make provisions if the value depreciates. So, whatever recovery happens in the first year may evaporate the next year if the valuation of the SRs diminishes.  But SR-issuing companies have a poor track record in redeeming SRs through the scheduled resolution of NPAs.
• The basic objective with which the regulators paved the way for creation of ARCs is the rejuvenation of ailing companies. However, they are yet to prove their mettle in playing such a constructive role in the financial system.
• Multiple infra debt funds on anvil
• The Planning Commission has suggested the setting up of multiple infrastructure debt funds to finance part of the funding requirements and has asked the finance ministry to create a framework for such funds.
• The finance ministry has already been in the process of preparing a framework for infra debt funds. Creation of such funds would require changes in regulations by the Reserve Bank of India and market regulator Sebi. Presently, Sebi regulations allow creation of equity venture capital funds only. The rules for external commercial borrowing may also have to be changed to allow such funds to raise debt from foreign insurance and pension funds. This is not permitted under the current ECB policy.
• The plan panel has also recommended changes in the withholding tax regime to make investment in such funds attractive for foreign investors. At present, the entire interest income is taxed whereas investors argue that only the net interest income, after deducting interest costs should be taxed.
• Making long-term debt funds available for infrastructure has proved difficult for the government. Banks find it difficult to lend to infrastructure sector because of asset-liability mismatch. Their primary source of funds, deposits, have a maturity of 3-5 years. They also have restrictions on how much they can lend to an individual project.
• India is ranked 86th out of 139 countries in quality of overall infrastructure, well below other emerging countries such as China at 50 and Brazil at 62 in World Economic Forum’s 2010-11 global competitiveness index.
• India will need over $1 trillion over the 12th Plan period to fund infrastructure development, most of which will have to come from the private sector.

International

• Saudi prince remains No. 1 in Arab rich list
• Prince Alwaleed bin Talal was ranked the richest Arab businessman by Arabian Business magazine for the seventh year after adding more than $2 billion to his wealth this year. Alwaleed’s assets were valued at $20.4 billion. Alwaleed built his fortune by investing in brand-name companies he considered undervalued, including Apple, News Corp and Time Warner.  He ranks 19th on Forbes magazine’s list of the world’s richest billionaires.
• Saudi Arabian businessman Sheikh Mohamed Bin Issa Al-Jaber was ranked the second richest Arab with $12 billion, up from $9.7 billion in 2009. He is the founder of MBI International.
• The Olayan family, with more than 50 companies from manufacturing to providing investments services, ranked third with $11.9 billion in wealth. Mohammed al-Amoudi, whose Corral Group owns Preem AB, Sweden’s largest refiner, followed with $10 billion. The Saudi Binladin Group with $9.8 billion was ranked fifth.