Efforts on to build consensus on FDI in multi-brand retail: FM

Finance minister Pranab Mukherjee’s comments follow commerce and industry minister Anand Sharma telling prominent business and political leaders at the World Economic Forum annual meeting in Davos that the decision to put on hold FDI in multi-brand retail is “just a pause”, forced by the compulsions of coalition politics

Chicago: Finance minister Pranab Mukherjee has said that efforts to evolve consensus on the controversial decision to open up multi-brand retail to Foreign Direct Investment (FDI) were on, reports PTI.

“We have further liberalised FDI in single brand retail, but our effort to open up the FDI in multi-brand retail trading has not been operationalised yet. We are in the process of building up consensus among the various stakeholders to take the next steps in that regard,” he said.

Mr Mukherjee was addressing a gathering of top business leaders, including from Fortune 500 firms, here on Saturday.

His comments follow commerce and industry minister Anand Sharma telling prominent business and political leaders at the World Economic Forum annual meeting in Davos that the decision to put on hold FDI in multi-brand retail is “just a pause”, forced by the compulsions of coalition politics.

After widespread opposition, including from its own ally, the government put on hold its decision to allow 51% FDI in multi-brand retail in November.

On the global growth scenario, Mr Mukherjee said the world is passing through turbulent times and the lingering effects of the financial crisis have of late become more pronounced.

“We have seen that the real danger to the global economy lies in the rapid contagion through today’s globally integrated financial markets...We cannot afford to have a piecemeal stop-go approach to address the issues confronting us,” he said.

Talking about the Indian economy, the minister asserted it is, in some ways, better placed than many other nations to withstand a fresh round of global economic turmoil.

He said the key objective this year is “to regain the growth momentum, strengthen the moderation in headline inflation... rejuvenate the markets and improve the business sentiments which have been at low levels for most of the last year”.

 

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Four companies drop IPO plans despite strong markets

If this slowdown in the IPO market continues, then there shall be significant impact on the fund raising abilities of Indian corporates. This will also have impact on the ability of exits for private equity funds

New Delhi: Despite bullish stock markets so far this year, four companies have refrained from coming out with initial public offers (IPOs) worth over Rs700 crore, letting their regulatory approvals lapse, reports PTI.

The companies which have let their regulatory approvals lapse include Micromax Mobiles, Pride Hotels, Betul Oil and Tara Jewels. These public issues were to raise about Rs701 crore, according to an analysts.

“The year 2012 has started on a very positive tone for the capital markets, with elevated mood of the sentiment and significant foreign institutional investment (FII) inflows,” SMC Global Securities strategist and head of research Jagannadham Thunuguntla said.

“Despite such positive momentum in the secondary market that momentum could not spill-over on to the IPO markets and about four IPOs were already called off so far this year,” he added.

Interestingly, there are at least 10 other companies who have valid approval in hand and are left with just two months in their validity period of one year from the date of approval.

These companies include Marck Biosciences, Tijaria Polypipes, Tara Health Foods, Embassy Property Developers, Dev Procon, VRL Logistics, Lokmat Media, Aravali Infrapower, Joyalukkas India and Semantic Space Technologies. The total amount that is expected to be raised by these 10 IPOs is to the tune of about Rs4,210 crore.

“The government’s disinvestment programme is also in “wait-and-watch” mood, the IPO market is not getting the kind of momentum that is expected to happen. If this slowdown in the IPO market continues, then there shall be significant impact on the fund raising abilities of Indian corporates. This will also have impact on the ability of exits for private equity funds,” he added.

Tara Jewels was the first company that failed to launch its Rs50 crore IPO before the regulatory approval lapsed on 3rd January, followed by Pride Hotels which failed to bring its Rs125 crore IPO till 12th January, Micromax Informatics could not come out with its Rs426 crore public offer which expired on 13th January and Betul Oil is the latest addition to the list after the approval for its Rs100 crore public issue expired on 18th January.

Last year, 29 companies, including Reliance InfraTel, Lodha Developers, Ambience, Glenmark Generics and BPTP, axed their IPO plans. The aggregate amount supposed to be raised by those 29 IPOs was to the tune of Rs32,398 crore.

 

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Good to have connections

Commercial strings are always part of the deal. Reliance Communication’s loan was made easier by its power arm’s October 2010 order for $10 billion worth of energy equipment from Shanghai Electric Group, a deal also financed by Chinese state banks

Last week it was announced that Reliance Communications, the mobile telecom arm of the Reliance Anil Dhirubhai Ambani Group (R-ADAG) in India had received a loan from three Chinese banks. Normally a loan by three banks to a large conglomerate would not be unusual. After all it happens all the time as part of regular business practices. This is what banks are supposed to do. They assess risk. If they find the borrower credit worthy, they make the loan. But this is loan is not ordinary. It is between two large emerging markets. The company involved is one of the largest in India. It is controlled by one of India’s best connected businessmen, Anil Ambani. Nor are the banks average, they are owned by the Chinese government.

Anil Ambani’s Reliance Communications had a $1.2 billion convertible bond, due to be repaid at the start of March 2011. This was a problem. Reliance has a reported debt of $7 billion. Since shares in his telecom, infrastructure, power and financial services company shares have fallen since the bond was issued in 2007, more than half last year alone, few holders elected to convert and the bond has to be repaid in full. Loans from traditional lenders like US and European banks would have been difficult due to economic conditions in Europe, India’s high interest rate and the falling rupee. But these problems are not of interest to Chinese banks. Their business model is a bit different.

Joseph Nye, an American professor at Harvard , coined the expression “soft power” 20 years ago. He defined it as “the ability to get what you want through attraction rather than coercion or payments.” Chinese state-owned firms are not necessarily out for profits. Part of their mission is directly related to extending “soft commercial power”.

The Reliance loan worked for this objective on several levels. First and most importantly for the Chinese is that it helped to establish a relationship. All emerging markets are relationship-based systems as Mr Ambani knew well. Like the elder Ambani, the Chinese use it for their profit. In a society with few rules and less transparency large networks of networks of family, friends, classmates, and especially (Communist) Party connections are a necessity.  

The Communist Party is especially involved with its state-owned business specifically its state-owned banks. In his book, “The Party”, Financial Times correspondent  Richard McGregor writes that the bosses of China’s 50-odd leading companies all have a “red machine” sitting  on their desks that provides an instant (and encrypted) link to the Communist Party’s leadership. Commercial enterprises for Chinese state-owned companies are a “continuation of politics by different means”

This is not to say that there is not a very definite commercial side to state directed moves by state-owned companies. No doubt Reliance’s loan was made easier by its power arm’s October 2010 order for $10 billion worth of energy equipment from Shanghai Electric Group, a deal also financed by Chinese state banks.

Commercial strings are always part of the deal. For example in Africa and South East Asia Chinese companies are looking for guaranteed supplies of oil or other raw materials. Often this is exchanged for building infrastructure like roads, railways, power plants and bridges that help Chinese companies extract the commodities. The infrastructure is also built by Chinese state firms, which hold four of the top five positions of the world’s largest contractors.

Many of these deals lack transparency, because they may involve bribes. Relationship based systems like China’s are never fond of the rules. In Africa, Chinese projects have been criticized for employing Chinese rather than local labour. When they do employ local labour, they can breach the rules as when managers in Zambia fired on a group of angry workers injuring 13. The Zambian opposition charged that the government had ignored labour law violations in exchange for political funding. Predictably the Chinese were not amused. The company executive complained that it was very difficult to do business in Zambia because “The opposition party always makes a big fuss over small problems.”

Still access to commodities and connections is secondary to profit.  Mr Ambani’s loan for an “extended” maturity period of seven years and an “attractive” interest rate of about 5% may not have been such a good deal for the Chinese lenders, but this is not all that important. China National Petroleum Corporation is one of only two companies to win contracts to develop Iraq’s oilfields for the simple reason that the royalties required by the Iraqi government made the deal of questionable value. Maximizing production is more important than profit.

Ultimately though making political concern dominant over profit does cost. If neither the Chinese banks nor Mr Ambani can allocate capital efficiently, the result will in time be a disaster.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])

 

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