Issues surrounding improving domestic fuel supply, price pooling for imported coal and signing of FSAs remain a big overhang with no immediate resolution likely in the new orders position in the power sector, says Espirito Santo Securities in its Fundamental Insight report
A slew of reforms, for example, debt restructuring of SEBs (state electricity boards) and anticipation of revision in Power Purchase Agreements (PPA), have brought back expectation of a revival in the power sector. Espirito Santo Securities, in its Fundamental Insights report, thinks that these reforms would be able to address only the current set of problems (tariff hikes to reduce current SEB losses and revision in PPA for imported coal based UMPPs—ultra mega power projects). Though this gives a positive signal to investors, 80% fuel supply under the best case scenario leaves little incentive for the IPPs (independent power producers) to commit fresh investments. Reforms implemented for improvement in domestic coal production (faster environmental and forest clearance) and price pooling across the projects for imported coal, would also improve the situation only after a couple of years. The industry oversupply situation would also mean that every incremental order would be bid for aggressively; leading to downward trends for EBITDA margins and return ratios for the power equipment suppliers. Espirito Santo continues to maintain ‘Sell’ recommendation on the shares of BHEL, BGR Energy and Thermax.
Owing to the issues surrounding the sector, capital goods companies have witnessed a sharp reduction in their order intake. BHEL registered order intake of Rs82.8 billion in H1FY13, a contraction of 45% y-o-y (year-on-year). Order intake for Thermax remained flat (3% y-o-y contraction), while for BGR it grew only on account of NTPC bulk tender (Rs37 billion). Espirito Santo points out that there is significant stress in the system impacting order inflows and revenue visibility. As per Coal India (CIL), green clearances have held up 244 mines leaving CIL with no room to raise output. The company is awaiting expansion orders at several mines with about 80 million tonnes of coal reserves and in some of the mines it has exhausted the limits up to which the clearances are in place. The shortage in fuel is adding pressure and the sector has witnessed a rise in stalled and shelved projects.
According to Espirito Santo, the private sector has been at the forefront of thermal power capacity addition, contributing 60%-70% of new orders over CY09-11. However, owing to issues over domestic fuel supply, pricing of imported coal and high interest rates, contribution from the private sector has significantly come down. In CY12 YTD, new orders from the private sector (9GW) contributed 30% to the total order pipeline. Most of the projects in the pipeline are awaiting environmental clearance, land acquisition or are at the planning stage and it seems unlikely that the current pipeline will contribute to order inflow for FY13 in any meaningful way.
The government’s reform focus was the feature of the last quarter, causing a powerful rally in Indian equities. It has resulted in the expectation that the new project announcements in the power segment will pick up, thus providing some respite to a sector hit by a drought in new order inflows. However, on the ground realities continue to reflect a very negative scenario, where order inflow from the power segment continues to decline every quarter and with the reform process not oriented towards an improving fuel supply scenario, Espirito Santo thinks that the bottom is not yet in sight. New orders from the power segment have contracted sharply, with orders in H1FY13 contracting by 57% y-o-y. New orders for the quarter at Rs79 billion have also touched their lowest levels since 2005 and have contracted by 91% y-o-y.
The Banking Laws (Amendment) Bill will gradually pave the way for more competition in the sector and will carve out a more efficient and more valuable banking system, says Nomura Equity Research in its Quick Note
What is the business impact of The Banking Laws (Amendment) Bill, 2011? For the banking sector, it is a long-term positive, says Nomura Equity Research in its Quick Note. “This will gradually pave the way for more competition in the sector and, as we have seen over the last two episodes of new licenses, will carve out a more efficient and more valuable banking system, says the broking firm. Some of the salient amendments that were demanded by the RBI (as a prerequisite to issuing new bank licenses) and have been approved are as follows:
(a) RBI to have the power to supersede bank boards for a period not exceeding 12 months. Under the existing Banking Regulations Act, 1949, the RBI has the power to remove a director or any other officers of the banking company. The amendment enhances the power of the RBI to supersede the board of directors of a banking company for a period not exceeding 12 months and appoint an administrator for managing the company during that period;
(b) Raise cap on voting right to 26% in private banks and to 10% in PSU banks from the existing 10% and 1% respectively;
(c) RBI has the option to inspect information and returns from associate enterprises of banking companies;
(d) The Competition Commission of India will approve M&A (mergers and acquisitions) in banks except in the case of banks that are under trouble. In such cases, the RBI will have the final authority, as is the situation now.
Specifically for the PSU banks, the 10-fold increase in voting cap will help drive increased investor interest and hence facilitate raising additional capital. The following is a rough estimate of the capital requirements for the major banks over the next five years assuming BIS-3—in rupees billion. The percentages in parentheses indicate the extent of dilution as a percent of FY12 net worth. SBI – Rs1,000 million (120%); PNB – Rs250 million (90%); BOB – Rs150 million (50%); Axis Bank – Rs200 million (85%); HDFCB – Rs30 million; ICICI Bank– negligible.
Under BIS-3, any shortfall in provisioning or pension liability funding will have to be adjusted against core equity capital, which makes it particularly difficult for the PSU banks. Beyond driving positive expectations long term— near term business concerns like tepid loan growth and the bad loan problems should not be overlooked.
The proposed new license guidelines are summarized below:
(a) Only India resident groups / entities will be allowed to promote a bank. Promoter groups should have a minimum track record of 10 years in successfully running their businesses, which will be verified by the RBI by coordinating with other government agencies. Groups which have a significant exposure to real estate & capital market activity (measured as 10% or more of income or assets or both from these activities in the last three years) will not be eligible for a new license. The new bank will have to be set up through a wholly-owned non-operating holding company (NOHC), which will house the bank and other financial services subsidiaries. All financial services companies belonging to the promoter group will have to be ring-fenced within the NOHC. The NOHC will be registered as a NBFC with the RBI. The NOHC will not be allowed to borrow funds for investing in the companies held by it. The source of promoter’s equity in the NOHC should be transparent and verifiable.
(b) The minimum paid-up capital will be Rs 5 billion. The NOHC should hold a minimum of 40% of the paid-up capital which will have a lock-in period of five years from the date of license. The shareholding in excess of 40% will have to be reduced within two years from the date of license. Even if additional capital is raised within the first five years from the date of licensing, the NOHC will have to maintain its stake at 40%. The NOHC’s stake should be reduced to 20% of the paid-up capital within a period of 10 years and 15% within 12 years from the date of licensing.
(c) The aggregate non-resident stake (FII, FDI and NRI) should not exceed 49% in the first five years of the license date. No non-resident shareholder can hold more than 5% of the paid-up capital. After five years, the aggregate limit for foreign holding will depend on the extant regulations (currently the foreign stake in private sector banks is capped at 74% of paid-up capital).
(d) At least 50% of the board of directors of the NOHC should be independent of the promoter group and ownership and management of the NOHC should be separate. No other financial services entity within the NOHC can engage in activities that can be done by the bank. The NOHC cannot set up a new financial services entity for at least three years from the date of licensing of the bank.
(e) Shareholding greater than 5% by individuals or groups will be possible only with the prior approval of the RBI and the stake of any single entity or group of related entities will be capped at 10%.
(f) The exposure of the bank to any single promoter group company should be capped at 10% and the aggregate exposure to all promoter group companies should not exceed 20% (of the paid-up capital and reserves). All exposures to promoter group companies should be approved by the bank’s board. The RBI will have the ultimate authority on whether a particular company belongs to the promoter group or not.
(g) The bank will have to list on a stock exchange within two years of obtaining a license. It should maintain a minimum capital adequacy of 12% for a minimum period of three years after starting operations.
(h) The bank will have to open at least 25% of its branches in unbanked rural areas.
(i) On the issue of conversion of a NBFC (non-banking finance company) into a bank, the RBI has discussed two options: Promote a new bank if some or all of the activities of the NBFC are not permitted for a bank. In this case, the NBFC will have to transfer all other activities that are permitted for a bank. The NBFC can convert itself into a bank, if all its current activities are permitted for a bank. Under the two options, a NOHC will have to be set up anyway. The existing branches of the NBFC can be converted into bank branches only in tier 3-6 centres. In Tier-1 and Tier-2 centres, prior approval of the RBI is required for converting the existing NBFC branches into bank branches.
The panel also recommended providing provision for setting up an authority to check misleading advertisements and inter-ministerial committee to file suo moto complaint in consumer court on behalf of consumers
New Delhi: To protect the interest of consumers, a Parliamentary panel has suggested the government to amend a bill to make it compulsory for shopkeepers to take back goods if found defective and regulate purchases through e-commerce and telemarketing, reports PTI.
In its report on Consumer Protection Amendment Bill, the panel has also recommended providing provision for setting up an authority to check misleading advertisements and inter-ministerial committee to file suo moto complaint in consumer court on behalf of consumers.
The panel, headed by Vilas Muttemwar, also suggested the Food and Consumer Affairs Ministry to make provision for "a law to govern and guard purchasing especially done through e-commerce and telemarketing thereby fixing responsibility on sellers."
"In our country, goods once purchased by consumers in good faith are not taken back by shopkeepers. ...consumers are exploited by shopkeepers and are compelled to buy goods merely on faith. The committee further desire that a 'return policy' should be chalked out which should be mandatory," the report, tabled in Parliament today, said.
The panel observed that some of the shopkeepers even write 'goods once sold are not taken back', hence, leaving no room for consumers for getting goods exchanges or returned even after some defect has been detected.
In the report, the Committee felt that the consumers are exploited by the shopkeepers and are compelled to buy goods merely on faith.
The report highlighted that there is need for up-dation of standards of quality of goods and services provided to consumers in order to conform to global standards. It has also emphasised on creating awareness about consumer rights envisaged in the proposed Act.
The panel has asked the government to fill up vacant posts in consumer courts without delay besides suggesting the Central government to share at least 30% to the salary of president, members and staff of consumer court since states lack resources.
It has recommended strengthening of monitoring mechanism for disposal of consumer related cases. "A clause to this effect may timely disposal of cases mandatory should be included in this bill itself."
The panel hoped that the passage of the amendment bill would overcome the shortcomings like delay in disposal of cases lack of infrastructure among others crept in due course in the functioning of the Act, thereby ensuring protection of the consumer’s rights.
The Consumer Protection Act 1986 has been amended thrice so far.