JV glitches delay $2.10 bn defence contracts

The total potential opportunity for domestic players in the defence segment is worth $5.10 billion. Out of this, $2.1 billion is the total worth of offsets expected. These bright prospects, however, could be delayed due to problems in JVs with overseas companies

The defence sector could have opened prospects worth $5.10 billion for private domestic players in India. However, glitches in the formation of joint ventures (JVs) between domestic companies with their overseas counterparts could hamper these prospects.

The defence sector has a planned capital expenditure (capex) of $10 billion. Though there is no hard and fast rule, historically 30% of this capex is sourced in the form of orders granted to domestic players. A 30% of the $10 billion translates into a whopping $3 billion capex on offer to domestic players.

The remaining 70% of the total $ 10 billion would be sourced from imports. While 30% of the imports have to be sourced to domestic players in the form of offsets, this adds up to another $2.10 billion worth of business for domestic players. Thus, $ 2.10 billion in addition to the $3 billion could mean potential opportunities worth $ 5.10 billion to domestic players like L&T.

However, defence plans for companies like Larsen & Toubro Ltd (L&T) could be delayed, given the difficulties in approvals for JVs with foreign companies. Earlier this month, L&T failed to receive a Foreign Investment Promotion Board (FIPB) clearance for a JV with Franco-German aerospace and defence group EADS, in the area of electronic warfare systems, avionics and radars, as it would exceed the cap on foreign investment.

“I think it would be sometime before L&T starts getting some major orders, except for a project where they have done the advanced technology vehicle (ATV). L&T would be delayed in its defence plans. The major core (from the defence sector) would have come from the JV, which is not happening,” said an analyst from a leading brokerage firm, who did not wish to be named.

Similarly, defence PSU Bharat Electronics Limited's (BEL) attempts to form a JV with foreign partners in the area of precision-guidance seekers for missiles have been hampered by the FDI cap. Potential overseas technology companies perceive the extent of equity allowed to be lower than their expectations. The allowed FDI in defence industries presently is 26%.

"We have been discussing about 10-12 proposals for JVs. One or two (will be) in India, some with foreign companies, especially for sub-sets of items like seekers,” BEL chairman and managing director Ashwani Kumar Datt told PTI.

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    Sensex drops 174 points, ends at 16,720

    Weak global cues, along with speculation over a possible tightening of monetary policy pulled down Indian markets

    Speculation that the central bank would tighten monetary policy to help stem rising prices ruled the Indian markets throughout the day, in addition to weak global cues. The Sensex declined 174 points from the previous day’s close, ending the day at 16,720, while the Nifty slipped 54 points to 4,988.

    During the day, Suzlon Energy announced the completion of payment of its entire outstanding acquisition loan facility of around $780 million. The stock was down 1%.

    Indowind Energy shot up 6% on reports that the firm saw 70% revenue growth in the fiscal year 2010.

    Fortis Healthcare was up 1% after the company completed the acquisition of Greenfield Hospitals Division of Wockhardt Hospitals comprising 10 hospitals in the metro cities of Mumbai, Bengaluru and Kolkata (including two under construction), on a going-concern basis.

    Smartlink Network Systems said that the shares of the company were de-listed from the Bangalore Stock Exchange with effect from 15 December 2009. The stock was down 4%.

    Lanco Infratech was down 3% after the company fixed 5 January 2010 as the record date for giving effect to the sub-division of one fully paid-up equity share of face value of Rs10 each into ten shares (of face value of Rs1), each fully paid up.

    During the day, the finance ministry said in a report tabled in Parliament that current levels of capital inflows into India can be managed without “significant costs”. The report also said that raising interest rates could attract more capital into India and complicate policymaking. The finance ministry also said that the central bank was facing a dilemma on timing its exit from an easy money policy, and the challenge was to support the recovery of the economy without compromising on price stability. The country needs to focus on expenditure reforms to cut its high fiscal deficit, the finance ministry noted in the report.

    The government is aiming to cut its fiscal deficit to 5.5% of gross domestic product in the fiscal year 2010-11 (April-March), from 6.8% estimated for 2009-10.

    The report said pressure on food prices was likely to continue and food imports could help stem price rises. The economy could grow more than 7.75% in the fiscal year to March 2010, the finance ministry said. The ministry further said that the economic survey 2008-09 in July had projected GDP growth could be around 7%, with an allowance of 0.75 percentage points on either side. “With the latest GDP data on September 2009 quarter being higher at 7.9%, the growth outlook for the next two quarters and for the whole year is likely to be in the upper bound of the range predicted, and may even exceed it,” the report said.

    Finance minister Pranab Mukherjee said that containing inflation is high on the government’s agenda and the government is monitoring the price situation.

    Meanwhile, the International Monetary Fund said that a fragile global economic recovery is underway. It said that a double-dip recession is unlikely. IMF spokeswoman Caroline Atkinson said that questions remained about the sustainability of the recovery, which has so far been driven by policy actions by various governments and central banks.

    During the day, key Asian benchmark indices in China, Hong Kong, Indonesia, Japan, South Korea and Singapore fell by between 0.05%-2.05% but the index in Taiwan rose 0.15%. The Bank of Japan unanimously voted to keep its overnight call-rate target at 0.1% as widely expected, and left its overall assessment of Japan’s economy unchanged, and emphasised the need to pull Japan out of deflation—perhaps laying the groundwork for more easing ahead.

    According to media reports, the Ifo Institute’s closely watched indicator of German business sentiment rose to 94.7 in December from 93.9 in November. Economists had forecast a rise to 94.5.

    Meanwhile, France’s business sentiment index declined to 89 in December from 90 in November, according to the monthly survey by the French National Institute of Statistics and Economic Studies (Insee). Analysts expected the index to be at 91 in December. Insee said that the business climate indicator remains below its long-term average.

    On Thursday, 17 December 2009, the Dow Jones Industrial Average slipped 133 points while the S&P 500 and Nasdaq Composite declined 13 points and 27 points respectively as jobless claims rose more than expected.

    Jobless claims unexpectedly rose 7,000 to a seasonally adjusted 4,80,000, in the week ended 12 December 2009.

    In premarket trading, the Dow was trading 33 points higher.

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    Forensic testing for CAT: Will it be in vain?

    After the fiasco, CAT will be subjected to forensic testing. However, experts believe that this move would just be another futile attempt to come out of the mess

    The computerised Common Admission Test (CAT) will now be subject to application of psychometric expertise and forensic testing to ensure fairness and validity of the test results. This is expected to figure out the batch of students likely to take a retest in January 2010. However, experts believe that this move would just be another futile attempt.

    Psychometric analysis is a standardised procedure for measuring sensitivity, memory, intelligence, aptitude or personality of a candidate. Vijay Mukhi, a well-known cyber expert said, “Forensic testing will not be able to identify the students who faced the problem. If they conduct the testing from the server side, all Prometric will receive is the series of questions that have been answered.”

    Mr Mukhi explained, “Forensic testing (which is used to explain the current state of a computer system, storage device or document) is used when you want to probe into a crime and there is no crime involved here. I don’t know why they are doing this testing because a very simple reason is that the viruses shouldn’t have entered the system in the first place. Forensics will only prove from where the virus came from. We are already aware of this.”

    About 2.42 lakh candidates registered for CAT 2009. About 2.16 lakh candidates completed the test successfully. The CAT committee yesterday said that about 24,000 students did not show up for the test. Another 2,000 candidates, who were rescheduled from the first testing window, remain to be tested.

    Students who were genuinely affected by the technical glitches and are thus worried about the fairness and results of the testing procedure will get a retest after Prometric completes the entire reviewing process which will be held in mid-January 2010.

    Prometric (India) managing director Soumitra Roy told PTI, "Prometric and the IIMs will be following industry-standard procedures to evaluate the answers. This consists of a combination of computer analysis and the application of psychometric expertise to ensure fairness and validity of the test results. We will contact them (the candidates) to reschedule the examination.”
    Prometric has already said that the answers have been not been affected by the virus attacks which disrupted the test from the beginning. It has further said that it was in the process of identifying candidates who have failed to appear for the test.

    According to Mr Mukhi, the real problem that Prometric faces is that it will have to prove that when the results were sent to the main server, no one would have had the ability to change the marks on the master server. Mr Mukhi also warned that failure in ruling out this possibility, could lead to litigation from the students.

    “The fact is that they used machines (for the examination) that were used for other purposes. Hence the virus attack (took place),” Mr Mukhi added.

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