MARCH 31, 2002
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Stanley Fischer Unplugged
He has the rare distinction of having advised through the half-a-dozen economic crises of the 90s. But now economist Stanley Fischer is calling it quits at the International Monetary Fund, and joining Citicorp as Vice Chairman. In India recently, Fischer spoke on IMF, India, and the global recession.
More Net Specials
The New New Thing
Conservative venture capitalists may yet be the perfect weathervane on emerging industries while they're, emerging.

In the ideas-economy, it is the venture capitalists who are, at once, patrons, catalysts, and liquidators. The year when it became evident that the internet changed everything other than the laws of classical economics, 2000, took the wind out of veecee-sails. And last year, 2001, (notably, the events of 9-11) transported the entire investing community into a fog so thick, few could see beyond their hard noses. In number-speak, the quantum of venture capital doled out in the US in 2001 was, at $40 billion (Rs 192,000 crore), a mere 39 per cent of the largesse that was showered in 2000. The corresponding Indian figures-$1.2 billion (Rs 5,760 crore) in 2001 and $500 million (Rs 2,400 crore) in 2000-actually look a lot healthier.

  No Schadenfreude In Steel  
  Why Maran Can't Play Father Christmas  
  Rollback Redux  
  Bengal's Newest Cottage Industry  
Much Ado Over Divident  

In India, consolidation has suddenly become a buzz word in an industry rarely given to non-tech shibboleths. Global Technology Ventures (GTV), and CDC Advisors are focusing their efforts on their existing portfolio. ''We look at a two-four year period to build a company,'' says Westbridge Capital's Raj Dugar whose primary aim these days is to ensure companies have enough funds to get them through that period comfortably. Elsewhere in the country, veecees are continuing to bet on apple-pie (read: everlasting favourites) investments in areas such as Business Process Outsourcing, Biotech, and Bioinformatics.

BPO is the universal favourite. The business grew at over 70 per cent last year-software clipped along at a relatively snail-like 30-odd per cent-and almost all of India's software heavies jumped on to the bandwagon. ''Cost and arbitrage efficiency are critical in the (BPO) business, and tilt the scale in India's favour,'' says Poornima Jeyaraj, a partner at Global Technology Ventures. GTV isn't the only one; Chrysalis, Walden, CDC, everyone wants to be part of the boom.

Is Foreign Paper Always Better?
Not really, but the rupee could make it so.

First, the facts: budget 2002 allows Indian mutual funds to invest in debt issued by foreign corporates. Given lower interest rates overseas, though, does it make sense for fund managers to exercise this option? Yes, say managers like Binay Chandgohtia, who manages the debt segment of IDBI Principal Mutual Fund: ''The currency exposure could yield attractive returns, if managed well.'' In simpler terms, an investment in foreign debt would appreciate when the rupee depreciates. The Reserve Bank of India is yet to announce the guidelines for such investments, but when it does, given the currency-exposure aspect, several funds may go the foreign paper way.

If BPO is old, then the list of other domains considered promising by veecees is downright ancient. This correspondent encountered responses that frequently featured enterprise software, wireless, products, and chip design. One venture capitalist listed nanotechnology, but stuttered when asked to provide details of Indian companies working in the area. ''Domain specific service companies that operate in the higher end of the value chain will attract investments,'' says Sudhir Sethi, Director and Chief Representative, Walden International. There's no shortage of such companies in India, and the fact that the likes of Pramati, Hellosoft, Adamya, and Netkraft, wrapped up a successful second round of funding in early 2002 bears Sethi out.

The surprise package this year could well be buy-outs of what veecees call late-stage companies. CDC attempted a buy-out with a surprise bid for CMC, but its application was deemed non-compliant. That hasn't discouraged Donald Peck, the head of the company's Indian ops. With India Inc in the throes of a restructuring drive, he expects many more opportunities. ''We are looking at government disinvestments and parts of large Indian companies.''

Still, no one, not even Peck, wants to talk about taking buy-outs to their logical denouement and launching vulture funds. Popular in the US-Hicks, Muse, Tate & Furst, Thomas H. Lee Partners, and Accel Partners are three well-known specimens of the genus-these specialise in buying out underperforming companies either for their assets, or on the belief that their underperformance is caused by poor management. The fund then strips and sells the assets, or puts a new management team in place to turn things around. If the gamble works, the fund sells the now profitable company at a premium.

Will 2002 see increased veecee activity? Going by numbers, one would think so. Conservative estimates put veecee investments in India in 2002 at Rs 5,280 crore; the actual figure, many reckon, will be higher. CDC, which invested $50 million (Rs 240 crore) last year, is looking to increase its investments by 50 per cent. ''If you look at projections for an economic rebound in late 2002, and you consider the long-term horizon of venture capital, then investing won't be affected by the current recession'' says Rishi Sahai, Principal, Infinity Venture Fund. Only, it is no longer a question of tracking the lemmings.

No Schadenfreude In Steel
The decision of the US to impose a duty on steel imports from developed countries such as Japan, Russia and the EU may actually hurt India.

George W. Bush: A back-handed slap to Indian steel

The Indian Steel Industry's stoic response to the US's imposition of a 8-30 per cent duty on imports of steel from the EU, Japan, and Russia is understandable. India accounts for less than 1 per cent of the 34 million tonnes of steel imported into the US (the bulk of it, galvanised, and cold rolled steel exported by smaller steel companies such as Jindal Steel, and Bhushan Steel), and the duty won't change that. Says B Muthuraman, Managing Director, Tata Steel: ''Anyway, Indian exports to the US had already become virtually zero or negligible.''

In 1998, the US levied an anti-dumping duty of 72.49 per cent, and a counter-vailing duty of an additional 12.82 per cent on Indian hot rolled steel coils, and an anti-dumping duty of 45 per cent on Indian cut-to-length steel plates, effectively ending India's steel exports to the US. While the EU's retaliatory action-already signalled by trade commissioner Pascal Lamy-will also exclude India, all these barriers will increase the quantum of steel floating around the global market.

That could impact the domestic sales of Indian steel companies: import duties on steel have just been brought down in India, from 35 per cent to 30 per cent. Either way, the Indian steel industry loses.

Why Maran can't Play Father Christmas
On All Fools Day, Commerce Minister Murasoli Maran will present an Export-Import policy for the next five years. Here's why it won't matter.


» WTO frowns on direct as well as indirect subsidies
» Reducing transaction costs is outside his powers
» Labour reforms, even in special zones, is outside his powers
» Tariffs have been fixed by the FM

Like the 17-odd commerce ministers who have held office before him, Murasoli Maran will soon present an exim policy for the next five years. The minister's spin on exports should be interesting because there is little the government can do: the exim policy is becoming irrelevant. ''The days when the Commerce Ministry could play Santa Claus are over,'' says B. Bhattacharyya, Dean, Indian Institute of Foreign Trade, referring to the government's inability to dispense largesse in a market where most commodities can be brought into the country by anyone willing to pay the requisite duty under Open General Licence (OGL).

Nor can the government dole out direct subsidies to exporters-it risks being dragged to the dispute settlement body of WTO if it does-or create tariff barriers: Finance Minister Yashwant Sinha has promised to bring down the peak import duty to 20 per cent over the next three years. And although it seems to have acceded to demands from the exporter community for the continuation of the DEPB (Duty Entitlement Pass Book) scheme, essentially targeted at negating import duty on the import content of the exported product, the Commerce Ministry may have to eventually phase it out: WTO guidelines recognise DEPB as a subsidy.

The one way in which the exim policy can help exporters is by reducing the transaction costs of exports. That, says T.R. Kathuria of Delhi-based Globe Enterprises, can be achieved by ''reducing the interest on export credit, and creating world-class infrastructure''. Neither is within powers of the Commerce Ministry, although the reduction in the interest rate on small savings (by 50 basis points) announced in Budget 2002 could portend a move to lower the interest rate on export credit. And as S.K. Saraf, the Vice President of the Federation of Indian Export Organisations, points out, ''by levying a 5 per cent tax on inland haulage services, storage, and warehousing in his new budget, Sinha has further added to transaction costs''.

But the growing irrelevance of the exim policy isn't all grey: it may prompt exporters to strive for competitiveness built around their own abilities. As for the government, explains Bhattacharyya, ''if it does something about infrastructure and allows the rupee to find its own level against the dollar, things should be fine''.

Rollback Redux
Political compulsions force the Finance Minister to dilute some already insipid budget proposals.

Yashwant Sinha: Wasted words?

For those who came in late, in 1998, Yashwant Sinha was forced to go back on some bold measures he had announced in his budget for the year by the Bharatiya Janata Party's political allies like Chandrababu Naidu of the Telugu Desam and Mamata Banerjee of the Trinamool Congress. One of those rollbacks-still remembered-had to do with a fairly insignificant rise in the price of urea.

Budget 2002 will bring back memories of those rollbacks-which earned him the sobriquet Rollback Sinha-to the finance minister. This time too, his hand could be forced by allies of the BJP, even by insiders; and there is little the fm can do despite his articulated determination to ''protect the integrity of the budget''.

A Beautiful Business
Why businesses should cheer Russel Crowe this Oscars.

Crowe: From gladiator to economist

It's john F. Nash Jr.'s day at the Oscars this year. The man is the father of modern game theory; his 27-page dissertation dated 1951 outlined one of the most ubiquitous tools in contemporary business-the Nash Equilibrium. This assumes that no player can improve his or her payoff, without a clear understanding of the other player's strategy. The Equilibrium is vital in domestic and international trade, auctions (for 3G licences, say), pricing strategies and the like.

For his work, Nash, who lapsed into near madness in the 1960s (he thought aliens were sending him messages through the columns of newspapers) won the Nobel Prize for Economics in 1994. Russel Crowe plays Nash in the motion picture, and is one of the nominees for best actor. Should he win, economics will have its very first Oscar. Hurrah!

Not only have the weeks following the budget seen a chorus of demands by the BJP's co-constituents in the ruling National Democratic Alliance (led by Naidu and Banerjee again) on rolling back hikes in the price of LPG and kerosene, even sections of the BJP have joined in. The riots in Gujarat, and the crisis that Ayodhya is fast turning out to be have made the BJP vulnerable and economics will likely be sacrificed at the altar of political exigency.

The riots come in the wake of the BJP's dismal showing in elections in four states, and the party is in no position to reject the demands of its allies-not if it wants to complete its term in office. ''We will oppose any anti-poor measures taken by the government,'' says Yerran Naidu, the TDP leader in the Lok Sabha.

Result: Petroleum Minister Ram Naik says (on the issue of the hikes in LPG and kerosene prices), ''the Prime Minister has said he will look into it''.

The hike in urea prices will probably go too. To keep its allies happy, the government could bring dividend income within the purview of section 80 L of the Income-Tax Act so as to grant tax-payers some relief. And it is said to be considering a reduction in the service tax on insurance policies.

Left to himself, the fm would never agree to a rollback. He will probably be sensitive to being labelled Rollback Sinha again, but the political dice is loaded against his proposals.

Bengal's Newest Cottage Industry

The expiration of copyrights on the works of Tagore spawns a T-boom.

Tagore galore: Going cheap now

Circa 2002, say hello to rabindra-rock. sacrilegious as that may sound, it's happening. For 60 years, Vishwa Bharati, the university Rabindranath Tagore founded retained sole rights to his works. The period ended on the last day of 2001, and the party has just begun in Bengal's publishing and music industries. Of the Rs 3.5 crore of business conducted at the recently concluded Kolkata book fair, some publishers estimate close to Rs 1 crore to have come from the works of India's first nobel laureate.

One reason is price: a copy of Sanchayita, which used to cost Rs 175 in the copyright regime, is now available for Rs 90. Expectedly, the translation market is looking up with publishers like Rupa and oup ready to hit stores with their offerings. And the vast repertoire of Tagore's poems now on offer is a potent lure for every Bangla-pop artist worth his or her name. Says reigning Bengali pop icon Nachiketa: ''Now we have access to lyrics that we have been dreaming about." Saregama, the music company that is part of the RPG Group, has set the ball rolling by releasing a Hemant Kumar album featuring four of Tagore's poems. And new age Bengali pop band Parash Pathar is set to record an album featuring Tagore numbers. The purists are unhappy. ''Tagore is a national institution and we should ensure that the sanctity of his works are preserved,'' warns Vishwa Bharati Vice Chancellor Sujit Basu. Welcome to the market economy, Mr Basu.

Much Ado Over Dividend
New SEBI honcho G.N. Bajpai's first display of affirmative action hasn't pleased companies and investors alike. So, what's new?

SEBI chief G.N. Bajpai

The party ended on March 6. By then, in the five days since Budget 2002, 350-odd companies had declared interim dividends, an effort to circumvent Finance Minister's Yashwant Sinha's pronouncement on dividends being taxable in the hands of recipients. In a terse message, the Securities and Exchange Board of India (SEBI) asked all stock exchanges to adhere to Clause 16 of the Listing Agreement, which stipulates that a 30-day notice period be given before fixing the date for dividend payouts for shares traded in the DEMAT form.

That blow dashed the hopes of millions of shareholders and a few hundred promoters (more the latter, one would think) who expected to make a killing. Says Prithvi Haldea, CEO, Prime Database: ''The government has taken refuge in an antiquated guideline, which has no relevance today.'' With the entire market in DEMAT mode, argues Haldea, there is little relevance in maintaining the 30-day notice period.

Feeling the pinch of SEBI's move will be companies that have already announced dividends, Reliance Industries (Rs 500.6 crore), Tata Steel (Rs 1,47.3 crore), Tata Power (Rs 99 crore) Gujarat Ambuja Cement (Rs 62 crore) and Dabur (Rs 31.6 crore) among them: if dividends are not paid within a stipulated period, then the directors of the companies can be prosecuted.

Then, there's the issue of double taxation: since companies declared the dividend in March 2002, under the old tax scenario, they stand to pay a 10 per cent distribution tax, but if the dividend is deferred and it reaches shareholders in April, then under the revised tax proposals, the latter will be taxed. Little wonder, then, the Confederation of Indian Industry has declared the SEBI notice on interim dividend a ''reason for serious and protracted litigations''. End word: what is blood for one is business for another. SEBI's decision could fetch the Central Government at least Rs 1,500 crore by way of tax on dividends.