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MARCH 11, 2007
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The centre is looking at removing the distinction between FDI and FII investments. This will impact sectors like asset reconstruction, real estate and aviation, where separate ceilings apply to FDI and FII investment. However, allowing FDI through the FII route in the realty sector could result in prices shooting through the roof. The Asian financial crisis of the '90s is still fresh in mind, and a method should be devised to moderate possible volatility in key sectors.

S&P And After
For the first time in 14 years, international credit rating agency, Standard and Poor's (S&P), has raised India's credit rating to investment grade. S&P is the last of the three major international rating agencies to do so. Moody's Investors Service did it in January 2004 and Fitch Ratings in August 2006. The upgrade is likely to spur the flow of foreign investment into power, steel and other industries, which receive less than a tenth of the funds going China's way.
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Business Today,  February 25, 2007

Picking up steam: A Corus plant in the Netherlands
There has been much stock market consternation over the prices that India's ambitious corporate groups have been willing to pay for their foreign acquisitions. Tata Steel's stock on the Bombay Stock Exchange plunged 7.5 per cent on the day it announced that it had won Anglo-Dutch steel maker Corus on an additional premium of 33.63 per cent over its initial offer of 455 pence a share. At $12.1 billion, the Tata Group's Corus purchase is the biggest ever in corporate India. Unimpressed, Standard & Poor's put Tata Steel's long-term corporate credit rating on credit watch. Similarly, when Kumar Mangalam Birla announced that his aluminium company Hindalco was acquiring North America's Novelis for $6 billion (including debt on Novelis' books), the Indian buyer's stock fell more than 7 per cent.

Why is there a disconnect between managements and shareholders over the perceived value of these acquisitions? To put it simply, most institutional shareholders are focussed on short-term earnings, whereas the managements, especially the ones controlled by business families, think long term. Now, there's a second reason why deal valuations are soaring. Increasingly, companies from the BRIC nations (Brazil, Russia, India and China) are competing with each other for assets that can fetch them global scale. A simple reason why Tata Steel had to increase its Corus offer was the fact that Brazil's Companhia Siderurgica Nacional (CSN) decided to join the fray. In July 2002, Corus had unveiled a plan to merge with CSN but that never materialised.

It's not unusual for big M&A battles to be hard-fought. But these days, the distance that some aggressive bidders are willing to go has increased. Blame it on BRIC. Robust growth in their own economies is helping BRIC Inc. grow faster than their global peers. As a result, global investors are willing to bankroll them for acquisitions that are much bigger than the buyers' own balance sheets. Therefore, as long as the BRIC economies keep growing, there is little chance of deal valuations-at least, of those assets perceived as strategic-cooling. And there's little chance of that happening anytime soon.

Within days of Hindalco announcing its Novelis buy, there were reports that Russia's aluminium maker Rusal would make a counter-bid for the us-Canadian company. China's China National Petroleum Company has routinely pipped India's ONGC Videsh at the post for oil assets in parts of Central Asia and Africa. As is evident, BRIC Inc. is in a tearing hurry to grow. Corus catapults Tata Steel to the #5 position globally; Novelis has, by the Aditya Birla Group's own estimation, fast-forwarded Hindalco by 10 years in terms of downstream capacity. Stiffer competition will, however, mean that the buyers have to work that much harder to make the deals deliver. Should it happen that these deals don't fetch the promised value, the market will correct; buyers and lenders will be more cautious, and valuations will start looking like something that the buyer's shareholders are more comfortable with. Until then, BRIC vs BRIC will continue to delight the shareholders selling out, and not the ones buying in.

Let Gas Be

Not enough to fuel power: A Reliance Industries rig
The government's attempt to secure gas supply from Reliance Industries' kg basin for the power sector is entirely misplaced. Yes, power shortages are acute and securing gas will help quick capacity additions. However, such a move, if anything, will only distort the fuel market and push back reforms in the power sector. Here's why. It is a fact that pushing reforms in states to enable transmission and distribution (T&D) losses and thereby, restoring viability of the sector, is not enough. It would be the best choice had the problem not been so acute, and the sector any less critical to the economy. Hence, the growing power needs of the country in the medium term need to be met largely by capacity addition in the public fold, as reforms alone can ensure greater private play. And here, the government has failed, given its latest report card-during the Tenth Plan period (2002-2007), capacity addition at 23,000 mw is short by 40 per cent.

But that is not reason enough to spoil the evolving gas market. For, directing supplies to the power sector may result in electricity generation at a cost higher than that from alternate sources like coal and hydel. In turn, the power deal will leave an expensive and indelible imprint on the gas market, where demand outstrips supply by half. This is all the more relevant since the government has so far planned for future capacity addition largely on coal as fuel, where the costs are lower. This is amply reflected in the recent ultra-mega power bids, where prices were as low as Rs 1.20 per unit. Furthermore, the urgency to commission new capacities is not driven by industrial demand-industry is largely powered by captive capacity.

The bottom line is one of simple economics: supply without a price does not make for a commercial deal. If Reliance's gas supply is secured, it must be competitive vis-à-vis coal. After all, for the Eleventh Plan period, of the 68,000 mw planned capacity addition, only 2,000 mw is expected to operate on gas. Since the principal gas buyers-fertiliser and power sectors-are in government domain and not in the pink of health, the government has even less reason to intervene.

Nurturing the Entrepreneurial Spirit

A TiE meet: Everyone wants to be an entrepreneur
There are reports that the government is planning to set up an incubation fund to provide finance and mentoring to entrepreneurs with bright ideas. On the face of it, no one in his right mind can argue with this. Any programme that institutionalises access to venture capital, which is distinct from bank or development finance, can only give the economy a huge fillip.

But some caveats are in order. The first question that arises is: who will be in charge of running this fund? Bureaucrats and regular bankers are trained to be prudent and risk-averse. This makes them particularly unsuited to be in charge. One must quickly add here that there are many honourable exceptions to this rule. But it's also a fact that top-level appointments in public sector financial institutions depend crucially on political patronage. This is what gives rise to a queasy feeling.

Venture capital, by its very nature, cannot be disbursed along prudential lines. The venture capitalist has to make an often subjective call on which ideas will work and which won't. Also, only one or two out of every 10 ventures financed really take off, and many of the others have to be written off as duds. Most venture capitalists depend on a combination of scientific projections and their gut feel while backing projects. Giving bureaucrats and their political masters discretionary powers over vast sums of money carries with it the inherent risk that the entire exercise may degenerate into a game of patronage.

Is it, then, a good idea whose time hasn't yet come? No. Business Today feels that the idea, laudable as it is, will also become feasible if the government follows the public-private partnership model while implementing it. The government will do well to involve established venture capitalists in this programme. This way, it will retain a say over the broad direction of the venture, but not an overriding influence in the actual disbursal of funds. It can even follow the template created by The Indus Entrepreneurs and the Band of Angels where venture capitalists and other like-minded investors come together to finance and mentor enterpreneurs.

Also, it makes immense sense to route a part of the corpus through institutes like the IITs, the IIMs and other centres of higher learning, which should also be encouraged to set up their own venture capital funds. It bears reminding that Harvard University is also one of the world's largest venture capitalists. A few Indian institutions are now considered worthy peers of that august institution. This is another facet that they should try to emulate.