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MARCH 12, 2006
 Cover Story
 BT Special
 Back of the Book

Trade Battle
Hots Up

The never ending fight between European Union and the US has taken another twist. The EU has threatened to impose up to $4-billion-worth of sanctions on the US, after the WTO upheld a ruling that the latter failed to end an illegal tax rebate for exporters. Analysts believe that us now has three months to act to avoid the reimposition of retaliatory measures. A look at the flare up.

e-Credit: What Next?
In most developing countries financial service providers are not yet in a position to use modern credit risk management techniques. Many developing economies still need to establish functional credit information systems in order to improve the quality of financial information. Will they?
More Net Specials
Business Today,  February 26, 2006
Testing Metal
The Mittal-Arcelor fight is more than a corporate battle; it's a test of globalisation and India's own clout in the new world order.
In the eye of the storm: Mittal feels the heat

Managing a hostile takeover is never an easy thing. Apart from the target company raising its defences, labour unions and local politicians usually move in for their pound of flesh. Lakshmi Niwas Mittal, the Kolkata-born steel king who became the world's biggest producer by acquiring Wilbur Ross' International Steel Group in late 2004, must have surely anticipated stiff resistance from the world's #2 steel company when he announced plans of a hostile, $22.3-billion (Rs 1,00,350- crore) bid for Arcelor late January. But even Mittal, despite being the global dealmaker that he is, must have been surprised by the fury his bid has provoked in Europe.

Even as Luxembourg-based Arcelor's CEO Guy Dollé mumbled about the bid being inadequate (when announced on January 27, the offer price of m28.21 or Rs 1,495.13 per share was a 27 per cent premium over the previous day's close) and how Mittal should make an all-cash offer if he were serious, political leaders in France and Spain, besides Luxembourg, sprang to Arcelor's defence. France's fiery Finance Minister Thierry Breton called Mittal "a problem in the grammar of the business world", meaning, apparently, to say that Mittal should have consulted stakeholders before announcing a bid. President Jacques Chirac himself, due to visit India over February 19 and 20, expressed concerns over the quality of corporate governance at Mittal Steel. But in a subsequent interview to BT's sister publication India Today, Chirac said, "French authorities are concerned about the shareholders and (Arcelor). (But) there is no room for debate on questions like differences in corporate cultures between Arcelor and Mittal, or the conditions of the bid." Unlike Luxembourg, France does not own any stake in Arcelor, but some 30,000 of its people work for the steel company. More importantly, presidential elections are due in France in another 15 months.

The IPO Rush: New Sectors On Tap
Q&A: H.D. Kumaaraswaamy
Cleaning Up Banks
Rights Won, What's Next?

Gullible's Travels?

Bangalore Resets Clock
Q&A: Alain Dromer

As Mittal criss-crossed Europe in his private jet, meeting political leaders and trade regulators, it appeared that the world's third richest man would have to fight a lonely battle-until India, led by Union Commerce Minister Kamal Nath, came to his aid. At first, it seemed surprising that Nath should shoot off a letter to European Commission trade commissioner Peter Mandelson stating that "the reaction in some quarters of the European Union impinges on the letter and spirit of the National Treatment Principle" (WTO-mandated rule of equality to all members). While Mittal, 55, may still hold an Indian passport, Mittal Steel, of which he owns 80 per cent, is registered in the Netherlands. It's obvious that the Indian government would not have taken up the cudgels on his behalf had Mittal not been an Indian.

"The reaction in some quarters of the European Union impinges on the letter and spirit of (fair play)"
Kamal Nath
Union Commerce Minister

Yet, the Indian government may actually be testing its own clout in the new world order, where globalisation is the new mantra and WTO, its shrine. Is the Indian government really worried about the Mittal-Arcelor spat? We don't think so. But what it is worried about is the globalisation of convenience, where developed countries can ask for lower tariffs and other concessions when it suits them, but raise their own defences when it comes to other developing countries. And don't forget that the China National Offshore Oil Co. (CNOOC) had to withdraw from its bid for us-based Unocal after American regulators put the fear of communism in the local company. Unocal ended up settling for a lower bid from Chevron.

There is no doubt that the fight between the two steel companies has brought out Europe's paranoid side to the fore. France plans to amend corporate laws to allow companies to pop a "poison pill" by issuing stock warrants, which would make, at least, hostile bids that much more difficult. Earlier, late last year, the French government came up with a list of 11 sensitive sectors, where its permission would be mandatory before a foreign investor could acquire a significant stake in them. The law came in the wake of PepsiCo's rumoured bid for Danone. Mid-February this year, Germany also passed a similar law.

When BT went to press, Arcelor had announced that it would increase its 2005 dividend to 85 per cent. How does that matter? In its draft prospectus for the Arcelor bid, Mittal Steel says that it would scale down its offer price if Arcelor's dividend payout crossed m0.80 or Rs 42.4 per share. At 85 per cent, the payout works out to m1.20 or Rs 63.6 per share.

The fortnight's burning question.

Q. Will Gold Touch Rs 10,000 (per 10 gm)?

Yes. Nilesh Shah, President (Private Client Service), Edelweiss

Over a one-year horizon, gold prices will cross Rs 10,000 per 10 gram. The demand-supply mismatch will drive gold prices. In fact, our call on gold is that in the next two to three years, it may touch Rs 12,000 per 10 gm.

No. Sunil Ramrakhiani, Head of Research, IL&FS Investsmart Commodities

I don't think gold will touch Rs 10,000 in the next one year. But the bullish trend is expected to continue following investment flow into the commodity. Gold is considered a pseudo-currency, which is why it's being piled up by investors to fight currency weakness and inflation.

No. Naveen Mathur, Head of Commodities Operations, Fortis Comdex

The prices may continue to remain firm following the demand for gold. With the US "twin" deficits (trade and budget) inching towards unsustainable levels, central banks are switching to gold as a hedge against a possible weakening of the dollar. If gold maintains its present rate of appreciation,it should touch Rs 10,000 in 2008.

The IPO Rush: New Sectors on tap

It has been an interminable bull run on the Indian stock markets, and with the Sensex crossing the 10,000-mark, investors seem convinced that the deluge of foreign money, which has been fuelling the boom, isn't about to slow down. In the midst of all this, several new industries-not just companies-have stepped into the IPO market to make hay while the sun shines. Those range from multiplexes to radio and TV channels to jewellers to even shipbuilders (see Fresh Equity).

Take multiplexes. Shringar Cinemas was the first to debut, but since then, PVR Cinemas and Inox Leisure have tapped the markets. Now, some more sectors are taking aim. These include stockbroking (Sharekhan and Emkay Shares) and aviation (Deccan Aviation and Kingfisher Airlines). All the sectors, just like the investors, are counting on the fact that India's burgeoning economy will automatically put them on a roll too. Agrees S. Ramesh, Executive Director, Kotak Investment Banking: "Strong GDP growth and buoyant company performance are the two key contributors to this continuing interest."

If the market holds up, this may be just the beginning. Insurance, internet, real estate, airport infrastructure and logistics are some of the industries waiting to do an IPO. Given the inherent uncertainty of stock markets, they may decide to debut sooner than later. At any rate, the line up on Dalal Street promises to get vastly dandier. Equity investors, lick your chops

"Bangalore Is Back In Business"

Just a fortnight after taking over as the 18th Chief Minister of Karnataka, H.D. Kumaaraswaamy, fondly called 'Kumar Anna' by acolytes, seems to be a man in a hurry. Head of the first JD (Secular)-BJP coalition government in the state, Kumaaraswaamy wants to prove that his administration can deliver. And he has just 20 months to prove it before he hands over the chief ministership to his coalition partner. In an exclusive interview with BT's , the Chief Minister had a simple message to deliver: "I want to tell the CEOs who read this magazine that Bangalore and Karnataka are back in business". Excerpts:

Bangalore's infrastructure is getting worse by the day.

Everybody knows what the problems are. I want to provide solutions. Within a fortnight of taking power, I have already held three high-level meetings to address this situation. Half-completed flyovers will be finished. Potholed roads will be asphalted. Traffic situation is something we are working on. All the infrastructure problems of Bangalore will be addressed. One, however, has to realise that Bangalore grew very fast in the last 10 years. Infrastructure could not cope. We will accelerate infrastructure development. However, I want my investor friends to look beyond Bangalore also to Mysore, Mangalore, Hassan, Hubli, Dharward. We will provide all infrastructure to help industries establish base there.

Such promises have been made in the past too.

I have given strict deadlines to the bureaucracy to execute these projects. I know that the common man wants to see action on the ground, visual changes that he can experience. We will deliver that. I have set up a taskforce to ensure speedy implementation and I am personally heading it. I will also make surprise checks to ensure that work is being carried out.

The IT and biotech sectors have been made to feel unwanted. Do you agree?

I don't want to comment on whatever happened in the past. Let me use your magazine to tell all investors, "Bangalore and Karnataka are open for business. Please, come and invest. If you have problems, we will sort them out." The IT and biotech sectors have done a lot of work to create a name for Bangalore and I want them to continue to see Karnataka as a favoured investment destination.

Karnataka has lost the FAB city project to Andhra.

I have spoken to SemIndia's Chief Executive officer (which is the lead member of the consortium putting up the FAB city) Vinod Aggarwal and asked him to reconsider. We will provide all facilities they want. In future, we will ensure that Karnataka does not miss out on any big-ticket investment.

What happens to Bangalore's public-private partnership?

I firmly believe that the expertise of private sector could be used for the larger good. I am shortly convening a meeting of leading industrialists in the state. Bangalore Agenda Task Force will be revived (maybe under another name). We will definitely seek the help and guidance of private sector for the progress of the state.

One final question. What about your favourite industry (Kumaaraswaamy is a producer, distributor and exhibitor of movies and has produced five movies till date, including two mega hits)?

(Smiles) I have a project in mind. I will decide on that later. Of course, the film industry in Karnataka will be encouraged. Kannada movies must thrive.

Cleaning Up Banks
Suddenly, the market for NPAs hots up.

HSBC's Niall Booker: Bad loans sell

Unseemly blotches on banks' balance sheets, non-performing assets (NPAs), a euphemism for bad loans, have now morphed into an emerging and aggressively pursued asset class. A new breed of investors, mainly foreign ones, is willing to pay cash upfront to acquire them. Since October 2005, this space has witnessed nearly Rs 2,000 crore of cash transactions. The trigger: Reserve Bank of India's announcement in July last year of norms for inter-bank transfers of these assets. The players: ICICI Bank, HSBC, State Bank of India and Punjab National Bank as sellers and Standard Chartered Bank, JP Morgan, Deutsche Bank and Kotak Mahindra Bank as buyers. The total NPAs in the Indian banking system: Rs 1,11,000 crore.

The sellers' rationale: they get to clean up their books and get something out of (virtually) nothing. Earlier, they could either recover these loans themselves or through the Corporate Debt Restructuring Mechanism, both lengthy and cumbersome processes. The option of selling them to the Asset Reconstruction Company of India Ltd (ARCIL), the sole Indian player in this space, was not particularly attractive.

"ARCIL issued security receipts which were to be redeemed only after it actually recovered the dues," says K. Cherian Varghese, CMD, Union Bank of India. Cash sales are obviously more attractive.

For buyers, the low acquisition price makes these assets attractive as they can scavenge for significant returns. Market sources say ICICI Bank received about 15 per cent of the book value for Rs 1,300 crore of dicey assets it sold Stanchart recently.

Stanchart expects returns "in the high 20s (per cent) from its ICICI portfolio", says Vinayak Bahuguna, Head, Alternate Investment Group, at the multinational bank. How? By reviving these units, by settling with the promoters and by taking recourse to the law. The time frame: 18-24 months. Says Badri Narayanan, Associate Director, Ernst & Young India: "New investors, without a prior banking relationship with the defaulters, stand a better chance of resolving the issue."

Globally, this is a big business, and market sources say India can see huge annual inflows if the government eases the regulations. On the wishlist: removal of the foreign investment cap of 49 per cent in each asset reconstruction trust, the scrapping of the limit of 10 per cent for individual investors and tax breaks on the sale and purchase of NPAs.

Rights Won, What's Next?

BCCI's Sharad Pawar: Rising fortunes

Nimbus communications, a sports marketing and production company, stunned everyone with its $612.18-million (Rs 2,754.18-crore) bid for the four-year domestic and global television rights awarded by the Board of Control for Cricket in India (BCCI). But the bid raises some questions. The most elementary one is: what will Nimbus do with the rights? "It will have to come to one of us since it doesn't have a television network of its own," says R.C. Venkateish, Managing Director, ESPN, whose $401.9-million (Rs 1,808.55- crore) bid was the third highest. So, will broadcasters pay for Nimbus' ambition? "Unlikely," says another broadcaster.

Nimbus, though, isn't worried. Its Chairman Harish Thawani has reportedly told sections of the media that Indian cricket has "expanded beyond the local market to the US, the UK, and even to countries like Nigeria, Kenya and Fiji". Experts, however, argue that the Indian market remains the key; all the others combined can contribute at best one-fourth to total revenues. Then, there are rumours of a sweetheart deal between Nimbus and the Zee Network, which bid $513 million (Rs 2,308.5 crore). The BCCI brass, meanwhile, is basking in the afterglow of the staggering numbers. "We set out to maximise revenues and we've done that," a senior official says. In the midst of this uncertainty, the only party that's sure of its fortunes is the BCCI.

Gullible's Travels?
Travel portals are hot with VCs. Caution is advised.

Travelguru's Damera: Ticket to ride

When two of Silicon Valley's best-known venture capitalists (VCs)-KPCB's John Doerr and Sherpalo Ventures' Ram Shriram-made their first investments in India recently, one of the two internet companies they picked was The $3-million (Rs 13.5-crore) investment hasn't yet been formally announced because is a work-in-progress. But Doerr and Shriram were hardly the only VCs betting big money on a travel portal. In the space of 10 months, three other travel portals have attracted venture capital: In May 2005, got $10 million (Rs 45 crore) from SoftBank Asia Infrastructure Fund; Yatra Online, founded by ex-Ebookers Dhruv Shringi and Manish Amin, received an estimated $5 million (Rs 22.5 crore) from Promod Haque's Norwest Venture Partners, Reliance Capital and tv18 in January this year; and on February 3, WestBridge Capital Partners announced it was investing (reportedly $10 million or Rs 45 crore) in Travelguru, founded by 27-year-old Harvard Business School (HBS) alumnus Ashwin Damera (WBCP's co-founders are from HBS, too). Says Damera: "This model has been very successful in the us, Europe and even China." (Incidentally, world's best-known online travel firm Expedia's stock was hammered after it reported disappointing q4 earnings; peer group stocks were down too in sympathy.)

All the wide-eyed VCs are parroting a number produced and hyped obviously by the travel industry. WestBridge expects the Indian travel industry to touch $32 billion or Rs 1,44,000 crore by 2008 and Norwest puts it even higher at $50 billion or Rs 2,25,000 crore by 2009. The current size of e-Commerce in India is estimated at Rs 1,500 crore, of which two-thirds is from online travel (including flight and hotel bookings). For the travel portals to grow, the internet penetration in India will have to increase significantly. Currently, there are about 40 million internet users in the country. Sure, by 2010, their number is expected to jump to 110 million, but that may not be large enough for a crowded online market. Says a prominent VC who is currently considering five such investment proposals: "I think there will be only two players who will survive in the long run." Unless, of course, the portals can expand their reach to mass-market segments like railways, and inns and budget hotels. Most importantly, perhaps the portals would need to have a "mobile strategy", given that there are 83 million mobile phone subscribers (GSM and CDMA) versus 40 million net users.

Bangalore Resets Clock

Free for all: A typical day to work

Anybody who's ever spent time stuck on Bangalore's busy Hosur Road that takes legions of city code jocks to India's "Silicon Valley" must have contemplated one of the two things: One, turning into a stay-at-home spouse or, two, fleeing the city. That's because although the stretch is barely 20-km long, it can take two to three hours during rush hour to complete it, courtesy the 80,000 cars that pack it every day. That means even before the workday has started, employees come in feeling frustrated and exhausted. Obviously, that affects their efficiency and productivity too. So, some of the smarter companies like Biocon have come up with a solution: Reset the workday clock. Instead of working, say, 9-to-5, they are getting into work much earlier and going home earlier too. Biocon has switched to a 7:30 a.m.-to-4 p.m. schedule, and so has Siemens Information Systems. Tesco Hindustan works 8:15 a.m. to 5:15 p.m. Infosys, which has 15,000 employees on its campus, has been on an 8 a.m.-to-5 p.m. schedule since the mid-90s. Says Gautam Reddy, Biocon's HR head: "The new timings have received a good response from all the employees, since they spend less time stuck in traffic and get to spend quality time with their families." The only problem: If more companies switched timetables, the Hosur Road stretch will be back to square one.

"We Are A Big Ambassador For India"

As the CEO of HSBC group Investment Businesses, Alain Dromer oversees $246 billion or Rs 11,07,000 crore in assets (as on June 2005). Recently in India to attend HSBC's global management committee meeting in Mumbai, Dromer spoke to BT's on the India opportunities. Excerpts:

Any particular reason for holding the meeting in India?

We strongly believe that the potential in India is huge. We are a big ambassador for this country in the global stage, having put forth Indian equity fund in our global range, called Global Investment Fund (gif). We have sold the fund all over the world and I want my colleagues who are selling the fund in different countries and regions to take a look at what this country is becoming and to feel and touch as to what is happening in the country.

What is the function of HSBC Investment Businesses?

I am part of the Group Investment Businesses, which supports the group clients (ranging from institutions to banks to individuals) when they develop investment products. When these customer groups need to sell investment products like insurance or credit cards, they approach us for developing the product anywhere in the world.

What type of Indian products are you managing and offering to your investors?

Locally, we are managing all types of asset class and are trying to expand the product basket. We have global teams that are managing Indian instruments by way of global and Asian bonds that have Indian exposure. In global emerging markets, we have created equity instruments like the BRICS fund. In general, there is an exposure to India and Indian products in many different ways. The group has a strong confidence in India as a long-term, fast-growing story. We are also considering multi-manager fund-of-fund in India. We would also definitely consider developing equity here, as there are interesting propositions in India.

Do you see future growth in India for HSBC from high networth individuals (HNIs)?

Yes. We are setting up our portfolio management services in India as we see huge potential inflows from HNIs. The hiring process is on and the PMS (portfolio management services) business will be under HSBC Asset Management.

How much do you recommend your overseas clients invest in emerging markets?

There should be a lot of precaution, and investment of 10-15 per cent in emerging markets is a rough estimate. Individual ability to take risk and his investment time horizon will decide the exposure to emerging markets. However, in 2006, we are overweight on emerging markets because they are expected to give higher return than other markets.

How do you look at the valuation of Indian stock markets?

Indian market is well valued, if not over valued. It's not opportunistic compared to markets in China and Russia. 2006 will be bumpy for the Indian market, unlike 2005, which was very peaceful. However, 2006 will be the year for equities in Asian emerging markets. India is so very important that we cannot make any predictions about it. We are committed to India, which is why for our budget in 2006, India is a place where we have the highest growth of head counts. We are optimistic as India has huge potential. We have only scratched the surface.




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