Ness Technologies' Raviv Zoeller: Managing others' R&D out of India

In a lean period for business news, they would have made headlines. The past few months, however, as anyone who reads the papers, white and pink, will aver, have been anything but lean. And so it is, that three significant developments related to the stockmarket have almost gone completely unnoticed. The first is the government's refusal to institute a market stabilisation fund to artificially prop up the market in case of a bear run. The second is its decision to allow insurance companies, both state-owned and private sector, to invest in large and high-quality initial public offerings (IPOs). And the third is its proposal to amend Section 20 of the Indian Trusts Act of 1882, to allow trusts to park short-term funds in securities of their choice instead of those earmarked by the government.

All three point to a common end: the Indian capital market has come of age. The government would seem to have decided that it is something that can fend for itself and be opened up to new players such as insurance companies that typically have a very long-term perspective of risk and return.

In terms of structural parameters such as operational and systemic risk management, settlement systems, disclosures norms, and accounting standards, the Indian securities market is at par with the best in the world.

Take the case of settlement of stock transactions. In the UK, weekly settlements are still the norm; the NYSE (New York Stock Exchange) follows a t+3 system, which means all settlement must be made within three days of the transaction; but the Indian stock market has already moved to a t+2 norm (it did so in April 2003). "Even the transparency exhibited in the IPO book-building process in India is not witnessed in developed markets," contends Ajay Bagga, CEO, Kotak Mahindra Asset Management Company.

Yet, the Indian stockmarket continues to remain shallow, vacillating between scams and market misconduct. For instance, since the second half of the 1990s when the markets became far more transparent and accessible to millions of middle-class Indians, they have been ravaged by one scam after another, CRB Mutual Fund in 1997, the Harshad Mehta scam of 1992 and, again, 1998, UTI in 1998 and, again, 2001, and the Ketan Parekh scam of 2001. And while the past few years have not witnessed any scams, the Indian stockmarket is still woefully short of depth and width. In part, this has to do with the limited free float of shares of many companies. "Since promoters routinely hold 40 to 50 per cent of the stocks in their company, there is little free float available making the "impact cost'' very high for bulk purchases,'' says Bagga. What he means is that if you want to buy lots of shares of a single company, you have to pay a very high amount.

And, in part, this has to do with the limited participation of retail investors and domestic financial institutions. Today, while foreign institutional investors (FIIs) have invested around $60 billion (Rs 2,70,000 crore) in the stock market, and high net worth individuals around $30 billion (Rs 1,35,000 crore), domestic financial institutions and the retail investor have invested as little as $15 to $17 billion (Rs 67,500 crore to Rs 76,500 crore). In the US, retail investors control nearly 50 per cent of the total stocks in play through pension funds or mutual funds. In numerical terms, 39 per cent of the American population is an active participant in the $14 trillion (Rs 6,30,00,000 crore) American stock market; in India, the corresponding figures are 1.5 per cent and $350 billion (Rs 15,75,000 crore). Which is where the move to allow pension funds and insurance companies (both long-term players) to invest in the stockmarket could help (analysts mention the specifics of higher liquidity, more stability, and greater depth). After all, it was President Reagan's decision to allow pension funds to invest in stocks in 1981 that set off a 15-year bull run in the US.

-Ashish Gupta

ON THE ROAD DEPARTMENT
Bloodline
India's first cord blood stem-cell bank, Lifecell, opens shop in Chennai. Big Deal? You bet!

CRYO-CELL's Abhaya Kumar: Futureproofing us

The future of genetic medicine can be found at Keelakotaiyur in Tamil Nadu where India's first cord blood stem-cell bank Lifecell will soon be functional. Stem-cells, for the uninitiated, are super-cells that are versatile enough to perform a variety of functions and research is on to condition them to grow into entire organs or parts of them (think cardiac tissue, lung and liver cells and the like). The new, researchers hope, can replace the old and the worn within the human body, increasing longevity and serving as a miracle cure for degenerative disorders.

This branch of medicine is called regenerative medicine and it is no longer in the realm of science fiction. Cord-blood, collected from the umbilical cord, is a rich source of stem-cells and is already considered a better alternative than anything else for use in transplants that people suffering from leukemia and other immune disorders undergo. The cord blood of a newborn can be used in case it contracts an immunological disease later in life, or in case any of its siblings does. And, if all goes well, as already hinted, it can one day help a donor in his or her dotage combat Parkinson's or multiple sclerosis (yup, stem-cells can treat these degenerative diseases too).

All this doesn't come cheap. Asia cryo-cell, promoted by S. Abhaya Kumar, one of the men behind Shasun Chemicals & Drugs, a Rs 273-crore bulk drugs manufacturer, and which has a licensing arrangement with the us-based cryo-cell International Inc., the world's largest cord blood stem cell banking firm, plans to charge customers a one-time fee of Rs 59,000 or an equivalent yearly payment, to store the stem-cells for 21 years.

At the end of this period (the newborn is now old enough to take a decision), the donor can decide whether he or she wants to continue with the storage. "We are still the cheapest in Asia," says Abhaya Kumar, the Vice Chairman and CEO of the company. Asia cryo-cell has invested Rs 12 crore in the facility and hopes to break even by end-2007, by which time it will have around 10,000 customers; and this point of inflection factors in storing the cells for 100 years elsewhere, should the company go bust, and a contingency storage plan with the Manila Institute of Life Sciences.

Abhaya Kumar's comment on cost isn't out of place-it costs anything between $15,000-16,000 (Rs 6.75 lakh-Rs 7.2 lakh) to store cord blood stem-cells for 21 years anywhere else in the world-but fact is, 75 of the 100 such banks currently present in the world are public ones that do not charge donors anything for collection and storage (donors who need stem cells later will, alas, still have to pay for them and are usually not guaranteed the return of the very cells they have donated).

Asia cryo-cell itself, discloses Abhaya Kumar, plans to set up a public bank and charge buyers in line with the market rates that could be anything upwards of Rs 3 lakh for a match. The donors though, pay nothing. And cryo-cell plans to use some samples in the research into diabetes it plans to carry out in association with the Manila Institute of Life Sciences.

As for the future of medicine, it may not be as far away as it seems. To date, there have been some 15 transplants in India involving the use of stem-cells.

-Nitya Varadarajan

Not Yet, But...
Banks tread thin ice in a desire to leverage the IPO-financing boom to their benefit.

Paper money: It's boom time for IPO financiers as many companies go public

Here's how this works. Assume that you approach a 'collecting bank' (bank collecting IPO forms and the money paid) for a loan of Rs 5 lakh to invest Rs 10 lakh in the same IPO. The bank takes Rs 5 lakh from you and also gives you a loan of Rs 5 lakh. As the issuing company is authorised to get the money only after the issue is over, the entire money (Rs 10 lakh) is kept with the bank itself (in another account). So for the bank, it is just a book entry (although you, as a borrower, will still have to pay interest). As most issues are oversubscribed, the banks don't lose anything. For instance, if the issue is oversubscribed twice over, and you receive only shares worth Rs 5 lakh (against your application for Rs 10 lakh worth), the bank will release your money to the issuer and reverse your loan by another book entry. In that sense, the banks are making money for nothing.

Herein lies the catch: because this is money for nothing or "free money", bankers have been tempted to become more aggressive and finance more of the application amount. This is against regulations (according to RBI), and it isn't. That's because, these loans are being masked as normal loans. For instance, if you are going to apply for Rs 10-lakh worth of shares in an IPO, the bank can give you a IPO-loan of Rs 5 lakh, and a personal loan of Rs 4 lakh. That way, your contribution will be just Rs 1 lakh (or 10 per cent). Here again, the banks will be totally safe if the issue is oversubscribed by more than 10 times. After all, that would mean that you just get shares for Rs 1 lakh (the amount you have actually paid up). Still, it would be foolish to expect that the current fever of oversubscriptions (downright obscene in some cases) will continue. And if the market crashes in the middle of things, the bank may have to take a major hit. Is this within RBI's control? Indeed, it is; the central bank can simply restrict banks from lending for IPOs for which they are also 'collecting banks'.

-Narendra Nathan

IDEA
Retail Brotherhood

Decades ago, when dairy farmers in India realised that market middlemen weren't helping them get the best prices for their products, they launched a cooperative federation, which today is a giant called Amul. Circa 2005, it's now the turn of small food retailers to set up a self-help group of their own-but with the know-how from a Dutch cooperative called spar. Spearheading the movement in India is Radhakrishna Foodland (a retail logistics company, and part of the Radhakrishna Group), which recently obtained a licence from spar to launch a food retailer cooperative in the country. As in the 34 other countries where spar operates, the idea in India is to bring together small mom-n-pop retailers (only food in India's case) and help them with retail technology, including everything from staffing to training and sourcing to marketing. Says Raju Shete, Chairman & Managing Director, Radhakrishna Foodland: "We believe that the entry of the spar brand into India will usher in a new cooperative model in food retailing, solely aimed at protecting the interest of the independent retailer members." The first spar store will open at Juhu in Mumbai in December this year and will showcase the benefits of retail the spar way. Given that there are thousands of small and independent food retailers in the country, Radhakrishna may just cook up a retail revolution.

-Roshni Jayakar

NEWSMAKER
Phase III Diva

Who is this lady?

Deepanwita Chattopadhyay, CEO, ICICI Knowledge Park.

Why is she here?

She is CEO of India's best-known biotech and pharma park (in Hyderabad), which is probably the only professionally managed research park in India.

And...?

Well, the park is into its third phase now (bookings complete). The first two phases, that cost Rs 39 crore, saw it build a total laboratory space of 58,000 sq. ft. that is now occupied by 14 companies, Indian and multinational. The third phase will see the construction of an additional 22,000 sq. ft. of lab-space at a cost of Rs 7 crore.

-E. Kumar Sharma

Brussels, Madrid, New Delhi, Mumbai
Louis Vuitton's Chairman and CEO insists they are in the same league.

Louis Vuitton's Yves Carcelle: He can smell the rich a thousand miles away

It warms the insides of even a hard-nosed journalist like yours truly when Mumbai and New Delhi are equated with Brussels, the seat of the European Union, and Madrid, Spain's most happening city. So, while Yves Carcelle, Chairman and CEO of the Paris-based fashion house Louis Vuitton, part of luxury goods major LVMH, is unwilling to say how much business the brand's first outlet in India, in New Delhi, does, or how much the second, in Mumbai and it has just opened for business, hopes to do, he sweetens his refusal by adding that "Mumbai or Delhi would be in the league of Madrid or Brussels." He thinks for a moment and adds, "Shanghai is in an altogether different league of Tier-I cities." One would have guessed as much, but this isn't about Shanghai (a Tier-I city, according to Louis Vuitton means independent stores in the city do a business of around 20 million euros, Rs 119- crore, each); it is about Delhi and Mumbai; ergo, the happy feeling described in the opening sentence of this composition.

Then, the realisation sinks in that when Monsieur Carcelle says Mumbai and Delhi, he is referring to the Mumbai of the Taj Mahal Hotel, Apollo Bunder and the Delhi of the Oberoi Hotel, Zakir Hussain Marg where the Louis Vuitton stores are based. "We usually start in new markets in protected environments such as these," says Carcelle. "We don't want to risk having Kentucky Fried Chicken (KFC) next door." His reference is generic, so this writer doesn't press the point about KFC having all but exited India (the last store is in Bangalore, and was still serving chickens when this magazine went to Press, although an alert on the website of the Indian arm of PETA, People For Ethical Treatment of Animals, urges viewers to 'ask KFC to get the cluck out of India') and decides to eye the merchandise.

The 2,500-sq. ft. store at the Taj stocks a range of the firm's leather products, shoes, and accessories with prices ranging from Rs 5,000 for a key chain to Rs 7,00,000 for a suitcase that obviously goes with this. "When an economy sees the rate of growth India is seeing, it means several things are happening," offers Carcelle helpfully, "The most important is that there is a growing breed of entrepreneurs, corporate executives, and in India's case, a mass of non resident Indians returning to participate in the growth here; Bangalore is on the world map; 10 years ago, Indians studying in the us stayed on but today they are coming back; all this means mindsets are changing and as pioneers in the fashion business, we see ourselves as market creators and this is exactly what we are here to do."

In effect, that would mean that the market for luxury goods in India is no longer restricted to the people who shop abroad (they will probably still do and you can't catch them dead in a Louis Vuitton store in India; one in Paris is more like it) but has moved on to the next lower level.

The tipping point, suggests Carcelle, may have well been reached. "Some of our closest rivals are eyeing the market," he says. "The minute we enter a market, they start assessing it."

-Priya Srinivasan