Yeah, we had the same response as our readers when we saw that freak move in the EURUSD. Apparently, despite the fact that absolutely nothing has been resolved,Reuters just ran a headline that "Euro zone reaches deal on second Greek bailout package." And that is all it took for the EURUSD headline scanning algos to surge by 60 pips. That there nothing substantial in it, or that this is merely a rephrasing of the actual Bailout 2 announcement from before, is irrelevant. Here is what the actual Reuters report said.
Euro zone finance ministers struck a deal early on Tuesday for a second bailout programme for Greece that will involve financing of 130 billion euros and aims to cut Greece's debts to 121 percent of GDP by 2020, EU officials said.
"The financial volume (of the Greek package) is 130 billion euros and debt-to-GDP (will be) 121 percent. Now it's down to work on the statement," one official involved in the negotiations told Reuters.
Another official confirmed that the financing would total 130 billion euros with the aim of reducing Greece's debts from around 160 percent of GDP now to 121 percent by 2020.
So just the little matter of the statement, which is what has be en the actually stopping block for the past 6 months. And incidentally, the broad strokes of this announcement is a carbon copy of the second bailout deal reached back in the summer of 2011. Inother words, there is nothing substantial to this, and is merely boilerplate. But it was good enough to fool the algos. Now the only question is how long until this latest and greatest deal concoction falls apart again, and the whole farce is repeated all over.
To fund a deficit of 600,000 crores, the RBI might need to print 200,000 crores
Advance Taxes Are Not Enough
December, was when corporates (and individuals) pay another chunk of advance tax. This should have bolstered government revenues, but it seemingly has not. Total tax revenue in December, net of what was paid to the states, was Rs 99,944 crores, just 5.3% above the previous year. For the April to December time period, tax collections are just 7.5% higher.
Consider that India's Gross Domestic Product has grown 16% in "nominal" terms — that is, before inflation is removed. Government tax revenue should grow at the nominal rate (at least), but increasing inflation has eaten substantially into profits and thus, to taxes.
Meanwhile, government expenditure is growing at nearly 14%. No wonder the deficit is now at Rs 3.8 lakh crore, which is already more than 90% of the budgeted deficit for the entire year.
Lower Corporate Profits
Analyzing the December quarter results which are being announced now tells us that corporate profits, from the 400 top companies, have fallen 1.5% from the same quarter a year back. The September quarter was also a declining number. While revenues have grown 26%, expenses have grown even more at 32%. A lower corporate profit number doesn't just cut directly from government revenues, it makes valuations of their stocks lower (and the government owns a large chunk of PSUs).
The Lack of Enough Non-Tax Revenue
Last year, a bulk of non-tax revenue came from selling the 3G and BWA spectrum. This year the government expected to sell equity stakes in public sector companies like ONGC and BHEL, which has not yet happened largely because the government believes the market prices are too low.
The government has tried innovative means of revenue. It has asked government owned companies to buy back their shares with their surplus cash. Nearly 30,000 cr. worth shares of large companies like L&T and Axis bank lie with SUUTI, a special purpose vehicle that was created when US-64, a mutual fund, was bailed out by the government. These could be sold, but prices will drop if the news is public, so the idea is to sell the shares into another SPV and use accounting magic to make the non-tax number. The most innovative, perhaps, was to attempt to charge Vodafone with an income tax order of more than 8,000 cr. after they bought the telecom company, Hutch; the Supreme Court has since ruled against the government.
Bailouts and Oil Subsidies
While expenses are up 14%, they don't include certain large ticket items. The oil deficit — the under-recovery because we price diesel, LPG and kerosene below market prices — is now 97,000 crores, and is likely to grow to about 125,000 crores. A good portion of that will have to be financed by the central government. There is an increase in the acquisition prices of food from farmers, there's more fertilizer subsidy, increase in payments to NREGA, and so on. For the last quarter, there are also bailouts of Air India, additional capital to the public sector banks and the whole election process to keep expenses higher.
Borrowing Impact: Credit and Inflation
Why are deficits bad? After all, what the government can't earn, it will borrow from the markets. What it can't even borrow, the RBI will print. The RBI is using Open Market Operations to buy bonds on the same day the government is issuing new ones — effectively printing money to fund the deficit. This is also what is happening in the US with the Federal Reserve buying bonds, in the UK and Europe, and in Japan. Then why is a deficit a problem?
The often stated problem is that money-printing at this level will stoke inflation. Effectively, to fund a deficit of 600,000 crores, the RBI might need to print 200,000 crores. That is an increase of nearly 15% in our money supply, and if you add another 10-12% from other ways, we'll be expanding money supply by one-fourth every year, a sure shot recipe for higher prices as the money chases the same goods.
Those other countries would love some inflation — but we're dealing with a lot of it, with inflation in double digits as recently as October. Germany and Zimbabwe have seen events of hyperinflation, when inflation was more than 100% a day. That was largely because of the unlimited printing of currency, and the inflationary spiral acts very fast if you cross a boundary. The RBI's actions may "bailout" the government borrowing programme today, but given that they have a strong stance against inflation, RBI is equally likely to increase rates or take up other measures if inflation goes back into double digits.
Increased borrowing also crowds out private credit — if the financiers can lend to the government at a good enough rate, they won't lend to you and me. And eventually, we are a private led economy (the government is less than 25% of our GDP) so the lack of private growth will hurt everyone.
High deficits are unsustainable, as Greece and Portugal are finding out. Regardless of how things might seem, and other news that seem to be grabbing headlines, now is the time for tough decisions. We may need to increase taxes, reduce expenses or find alternate sources of government revenue. We may need to forego some of the populist measures our government pushed down our collective throats. But will this happen or will we run to the new deity in town, the printing press?
Greece ended months of uncertainty by finally securing a new bailout and debt-restructuring agreement with euro-zone finance ministers, but doubts remain over whether Greece will be able to meet the ambitious terms of the accord.
The finance ministers agreed on the long-awaited €130 billion ($171.9 billion) deal after haggling into the early hours of Tuesday morning to settle the final details.
Officials said the meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece's debt to 120.5% of gross domestic product by 2020. International Monetary Fund Managing Director Christine Lagarde said that target was lowered from 129% at the start of the meeting.
Private-sector creditors agreed to take a write-down on their bonds of 53.5%—more than the 50% write-down that had been conceded before the meeting. The private-debt exchange is expected to cut Greece's debt by €107 billion, according to the Institute of International Finance, which negotiated on behalf of bondholders.
According to a statement from the finance ministers, Greece would also benefit from an arrangement in which the European Central Bank would distribute profits on its estimated €45 billion to €50 billion in holdings of bonds it bought in the secondary market in 2010-11 to euro-zone governments, which may then use them to help Greece.
Profits on an estimated €12 billion of bonds held by national central banks in the euro zone will be passed on to Greece, reducing its debt by €1.8 billion before 2020. The meeting decided against the central banks participating in the private-sector debt exchange.
The ministers also agreed to a further reduction in interest rates on the €53 billion in loans from the euro-zone made as part of the first bailout agreed upon in May 2010, saving some €1.4 billion.
"The deal is a good result for Greece, for the euro zone and for the markets, we hope," said Italian Prime Minister Mario Monti after the meeting.
Even with the agreement, economists expect the deal will leave longer-term questions about Greece's ability to pay off even its reduced debt burden. "There are downside risks. This is clear," said the IMF's Ms. Lagarde. "It's not an easy program. It's a very ambitious program."
The problem: The Greek economy must become more competitive through across-the-board wage cuts, allowing the country to export its way back to economic health. But that hoped-for export boom could take years to materialize.
After months of political brinkmanship and unrest on the streets of Athens, a deal on Greek debt may at last be in sight. Heard on the Street's Simon Nixon has the latest details. Photo: Associated Press
Meanwhile, falling wages will only deepen Greece's recession, making the government's debt burden—still large even after the restructuring—harder to bear.
The ministers agreed that the European Commission, the European Union's executive arm, would have "an enhanced and permanent presence on the ground" in Greece to better monitor Greece's economic performance.
Greece also agreed to put money corresponding to the following quarter's debt servicing bill into a special segregated account, and would agree to introduce a change in the Greek constitution to ensure priority is granted to debt repayments.
The second bailout would offer Greece €130 billion in loans on top of the €110 billion it received from the euro zone and the IMF in May 2010. The IMF, concerned about its large exposure to the euro zone, is expected to offer just a minimal contribution this time around, leaving euro-zone governments to shoulder the vast majority of the second loan package.
The IMF agreed to provide €30 billion of the first bailout, but officials last week expected its contribution to be just €13 billion this time around.
The agreement will set in motion an exchange of an estimated €200 billion of Greek government bonds in private hands for new bonds with roughly half of their face value, which must be completed by the middle of next month. That exchange could set off legal disputes with disgruntled bondholders.
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Analysts said the accord would have to be approved by some national parliaments in the euro zone, potentially causing uncertainty. A further test of the program will come in the months ahead, when the tough austerity measures Greece passed to secure the aid package are supposed to come into force.
These include yet another round of spending and pension cuts for an economy in its fifth year of recession, coupled with a 22% cut in the minimum wage.
With elections tentatively scheduled in April to replace the coalition government of Prime Minister Lucas Papademos, Greek politicians may become increasingly wary of standing behind the measures that just passed Parliament over popular outcry, analysts said
Their worries were heightened by comments from Antonis Samaras, the leader of the New Democracy party who is likely to be prime minister after the elections, who told Parliament last week: "I want to avoid the jump over the cliff today, to buy time, to restore normality and to go to elections tomorrow…. This is why I ask you to vote in favor of the new loan agreement today and to have the ability tomorrow to negotiate and to change the current policy which has been forced on us."
Marie Diron, an economist at Oxford Economics, said, "They have to satisfy the euro-zone governments while at the same time making very tough measures acceptable to their population. That is something a technocratic government can perhaps manage, but after the election it might become much more difficult for an elected government to satisfy these two goals."
Some euro-zone governments have taken a harder line with Greece. German, Dutch and Finnish officials have become increasingly skeptical that Greece will implement the painful economic policies its Parliament backed.
Dutch Finance Minister Jan Kees de Jager, speaking before the finance ministers' meeting, called for "permanent" oversight of the Greek government by officials of the so-called troika—the European Commission, the ECB and the IMF.
"When you look at the derailments in Greece, which have occurred several times now, it's probably necessary that there's some kind of permanent presence of the troika in Athens," Mr. de Jager told reporters upon arriving at the finance ministers' meeting. "Not every three months, but more permanent."
If Greece dutifully adheres to policies prescribed by the troika, the economic impact could be harsh, Ms. Diron said.
"Cuts in the minimum wage will bite very hard," she said.
Lowering the minimum wage is supposed to address some of the failures of the previous austerity packages, which focused on reducing the government's borrowing needs
SP TULSIAN.
Q: What about his potential news on Sterlite and Sesa Goa, how do you read it?
A: The background in which this news has germinated is that Vedanta group is looking to transfer stakes held by them in Cairn India to Serlite Industries. Sterlite Industries is going to become the holding company. If I move on this premise, it is a very positive move. But, ultimately everything boils down to the swap ratio because couple of years back Sterlite had moved similar proposal, which was against interest of minority shareholders. It was a bit complicated and they were forced to drop that proposal.
Cairn India holds 39% stake. I am excluding 24% stake held by Sesa Goa. So, if they transfer 39% stake into Sterlite Industries, eventually taking the current price as the base, they will be able to raise their stake in Sterlite Industries to about 75%. I am seeing this as a precursor by the group to initiate a move to purchase the residual stake of the government to the extent of 29% in Hindustan Zinc and 49% in BALCO.
Collectively, the group will require about Rs 23,000-24,000 crore for buying both these stakes. They need Rs 17,000-18,000 crore for Hindustan Zinc and Rs 4,000-5,000 crore for BALCO.
Ultimately, they will be looking to raise this kind of money based on cash flow of Cairn India. If Sesa Goa gets merged with Sterlite, this stake of Vedanta transfer to Sterlite, Sterlite will be holding 58-59% in Cairn India. Cairn India will be making a cash profit of about Rs 10,000 crore every year. So, they will be looking upon to capitalize this cash generation for buying out residual stake.
Otherwise in the present form, the balance sheet of Sterlite Industries will get stretched. There is no other point in buying residual stake in any other company because both these stakes are presently held by Sterlite Industries. So, it is a composite move and if that happens then Sterlite Industries will be the holding company for ferrous metal business, non-ferrous metal business and crude.
Apart from that, all the stakes in these three businesses will be more that 50%. So, everything will get consolidated on the top-line and bottom-line. In this background, there will not be in fear of company discounting for Sterlite valuations. If that happens, it will be very positive for Sterlite Industries overall and its shareholders, but one has to look for the swap ratio. I am presuming that swap will happen based on present market capitalization of all the companies.
All NSE Members,
Sub: Exclusion of futures and options contracts on 4 securities
Members are advised to note that based on the stock selection/exclusion criteria as prescribed by SEBI vide circular SEBI/DNPD/1/2012 dated January 02, 2012 and NSE circular No 045/2011 dated May 3, 2011, contracts for new expiry months in the following securities will not be issued on expiry of existing contract months:
1
AREVAT&D
Areva T&D India Limited
2
DHANBANK
Dhanlaxmi Bank Limited
3
MERCATOR
Mercator Limited
4
NATIONALUM
National Aluminium Company Limited
However, the existing unexpired contracts of expiry months February 2012, March 2012 and April 2012 would continue to be available for trading till their respective expiry and new strikes would also be introduced in the existing contract months.
This circular shall be effective from February 24, 2012.
Sub: Exclusion of futures and options contracts on 4 securities
Members are advised to note that based on the stock selection/exclusion criteria as prescribed by SEBI vide circular SEBI/DNPD/1/2012 dated January 02, 2012 and NSE circular No 045/2011 dated May 3, 2011, contracts for new expiry months in the following securities will not be issued on expiry of existing contract months:
1
AREVAT&D
Areva T&D India Limited
2
DHANBANK
Dhanlaxmi Bank Limited
3
MERCATOR
Mercator Limited
4
NATIONALUM
National Aluminium Company Limited
However, the existing unexpired contracts of expiry months February 2012, March 2012 and April 2012 would continue to be available for trading till their respective expiry and new strikes would also be introduced in the existing contract months.
This circular shall be effective from February 24, 2012.
India's largest lender the State Bank of India (SBI) referred three loan accounts including Bharati Shipyard (BS), ARSS Infrastructure and Vijai Electricals (VE) to the Corporate Debt Restructuring (CDR) cell. The sum total of credit exposure in these companies would be around Rs 3,430 crore by the bank, sources familiar with the development.
The SBI share of loans to BS comes around Rs 1,655 crore out of total exposure at Rs 5,650 crore by a consortium of 15 lenders. The bank lent Rs 773 crore to ARSS out of total loans around Rs 1,600 crore by eight lenders. For VE, it stood at around Rs 1,000 crore as against total Rs 2,200 crore by seven banks.
Credit exposure at a glance:
Figures are written on approximate basis.
At the time of CDR proposal submission in the third quarter (Q3), all three companies remained standard assets. Companies have been repaying the interest rate. In anticipation of defaults (before the principal payment becomes due), they were referred to CDR cell. As per RBI norms, a bank has to make provision of 2% on any restructuring of standard asset.
Under the regulatory frame work of the Reserve Bank of India (RBI), the CDR forum caters to an official platform for both the creditors and borrowers to amicably and collectively evolve policies for working out debt restructuring plans.
The CDR cell will make the initial scrutiny of the proposals received from creditors. It happens in two stages: flush stage and final report stage, all related to the economic viability study of the proposal. A loan account can be referred to the CDR cell when at least 75% of the banks (by value) and 60% of creditors (by number) agree to resolve the case under CDR system.
The asset quality concerns cast a shadow on the SBI's Q3 performance. The gross non-performing asset (NPA) ratio stood at 4.61% as against 4.19% in the previous quarter (Q2). The net NPA ratio too rose from 2.04% to 2.22 sequentially.
According to the SBI chairman Pratip Chaudhuri, as much as one fifth of fresh slippages had come from a single company (read Kingfisher Airline).
"So, if you look at the total slippages (net increase) of Rs 6,152 crore, one company alone accounted for around Rs 1,500 crore," the SBI boss said while announcing Q3 results.
However, Chaudhuri did not expect its Air India (AI) exposure turning into an NPA account. The lender has extended a fully secured Rs 1,100 crore loan as cash credit facility to AI.
The SBI share of loans to BS comes around Rs 1,655 crore out of total exposure at Rs 5,650 crore by a consortium of 15 lenders. The bank lent Rs 773 crore to ARSS out of total loans around Rs 1,600 crore by eight lenders. For VE, it stood at around Rs 1,000 crore as against total Rs 2,200 crore by seven banks.
Credit exposure at a glance:
Company
|
SBI exposure
(Rs in crore)
|
Total exposure
(Rs in crore)
|
Bharati Shipyard
|
1,655
|
5650
|
ARSS Infrastructure
|
773
|
1,600
|
Vijai Electricals
|
1,000
|
2,200
|
Figures are written on approximate basis.
At the time of CDR proposal submission in the third quarter (Q3), all three companies remained standard assets. Companies have been repaying the interest rate. In anticipation of defaults (before the principal payment becomes due), they were referred to CDR cell. As per RBI norms, a bank has to make provision of 2% on any restructuring of standard asset.
Under the regulatory frame work of the Reserve Bank of India (RBI), the CDR forum caters to an official platform for both the creditors and borrowers to amicably and collectively evolve policies for working out debt restructuring plans.
The CDR cell will make the initial scrutiny of the proposals received from creditors. It happens in two stages: flush stage and final report stage, all related to the economic viability study of the proposal. A loan account can be referred to the CDR cell when at least 75% of the banks (by value) and 60% of creditors (by number) agree to resolve the case under CDR system.
The asset quality concerns cast a shadow on the SBI's Q3 performance. The gross non-performing asset (NPA) ratio stood at 4.61% as against 4.19% in the previous quarter (Q2). The net NPA ratio too rose from 2.04% to 2.22 sequentially.
According to the SBI chairman Pratip Chaudhuri, as much as one fifth of fresh slippages had come from a single company (read Kingfisher Airline).
"So, if you look at the total slippages (net increase) of Rs 6,152 crore, one company alone accounted for around Rs 1,500 crore," the SBI boss said while announcing Q3 results.
However, Chaudhuri did not expect its Air India (AI) exposure turning into an NPA account. The lender has extended a fully secured Rs 1,100 crore loan as cash credit facility to AI.
An exclusive preview of an economic report on China, prepared by the World Bank & government insiders is alarming:
China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank & a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.
It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's 2nd largest economy has steadily expanded.
The report warns that China's growth is in danger of decelerating rapidly & without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking & elsewhere, the report warns, and could prompt a crisis, according to those involved with the project. It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship."
Current forecasts by the Conference Board, a U.S. think tank, see the Chinese economy growing 8% in 2012 & slowing to an average annual growth rate of 6.6% from 2013 to 2016. Economists argue that China's annual growth rate will begin to "downshift" by at least 2% points starting around 2015. While some reduction in growth is inevitable—China has been growing at an average of 10% a year for 30 years—the rate of decline matters greatly to the world economy. With Europe & Japan fighting recession and the U.S. experiencing a weak recovery, China has become the most reliable source of growth globally. Commodity producers count on China for growth, as do capital goods makers, farmers and fashion brands in the U.S. and Europe.
How much the report will help reshape the Chinese economy is unclear. Even ahead of its release, it has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions. China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will encourage Mr. Xi and his allies to discuss making changes to a state-led economic model that has alarmed Chinese private entrepreneurs while creating tension between China and its main trading partners, including the U.S.
Currently, state-managed enterprises tower over the Chinese economy, dominating the nation's energy, natural resources, telecommunications and infrastructure industries. Among other things, they have easy access to low-interest loans from state-owned banks.
China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barriers to private firms. Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate. The report also recommends a sharp increase in the dividends that state companies pay to their owner—the government. That would boost government revenue and pay for new social programs, said those involved with the report. Chinese and U.S. economists say that dividend money from profitable state-owned firms now is often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.
China is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own. South Korea was able to keep growing rapidly after it hit a per-capita income level of $5,000—about where China is today—because it pushed innovation. However, China lags behind South Korea badly in patents produced per capita, he said.
Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.
China could face an economic crisis unless it implements deep reforms, including scaling back its vast state-owned enterprises and making them operate more like commercial firms. "China 2030," a report set to be released Monday by the bank & a Chinese government think tank, addresses some of China's most politically sensitive economic issues, according to a half-dozen individuals involved in preparing and reviewing it.
It is designed to influence the next generation of Chinese leaders who take office starting this year, these people said. And it challenges the way China's economic model has developed during the past decade under President Hu Jintao, when the role of the state in the world's 2nd largest economy has steadily expanded.
The report warns that China's growth is in danger of decelerating rapidly & without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the "middle-income trap." A sharp slowdown could deepen problems in the Chinese banking & elsewhere, the report warns, and could prompt a crisis, according to those involved with the project. It recommends that state-owned firms be overseen by asset-management firms, say those involved in the report. It also urges China to overhaul local government finances and promote competition and entrepreneurship. The Chinese government must decide "whether it wants state-led capitalism dominated by giant state-owned corporations or free-market entrepreneurship."
Current forecasts by the Conference Board, a U.S. think tank, see the Chinese economy growing 8% in 2012 & slowing to an average annual growth rate of 6.6% from 2013 to 2016. Economists argue that China's annual growth rate will begin to "downshift" by at least 2% points starting around 2015. While some reduction in growth is inevitable—China has been growing at an average of 10% a year for 30 years—the rate of decline matters greatly to the world economy. With Europe & Japan fighting recession and the U.S. experiencing a weak recovery, China has become the most reliable source of growth globally. Commodity producers count on China for growth, as do capital goods makers, farmers and fashion brands in the U.S. and Europe.
How much the report will help reshape the Chinese economy is unclear. Even ahead of its release, it has generated fierce resistance from bureaucrats who manage state enterprises, according to several individuals involved in the discussions. China's political heir apparent, Xi Jinping, now vice president, has given few clues about his economic policies. Analysts expect the high-profile report will encourage Mr. Xi and his allies to discuss making changes to a state-led economic model that has alarmed Chinese private entrepreneurs while creating tension between China and its main trading partners, including the U.S.
Currently, state-managed enterprises tower over the Chinese economy, dominating the nation's energy, natural resources, telecommunications and infrastructure industries. Among other things, they have easy access to low-interest loans from state-owned banks.
China needs to restrict the roles of the state-owned enterprises, break up monopolies, diversify ownership and lower entry barriers to private firms. Currently, many state-owned firms have real-estate subsidiaries, which tend to bid up prices for land, and have helped to create a housing bubble that the Chinese government is trying to deflate. The report also recommends a sharp increase in the dividends that state companies pay to their owner—the government. That would boost government revenue and pay for new social programs, said those involved with the report. Chinese and U.S. economists say that dividend money from profitable state-owned firms now is often directed to unprofitable ones by the State-owned Assets Supervision and Administration Commission, or SASAC, which regulates the firms and tries to ensure their profitability.
China is vulnerable to a sharp slowdown, said Jun Ma, a Deutsche Bank China economist, because it relies too heavily on industries that copy foreign technology and doesn't produce enough breakthroughs of its own. South Korea was able to keep growing rapidly after it hit a per-capita income level of $5,000—about where China is today—because it pushed innovation. However, China lags behind South Korea badly in patents produced per capita, he said.
Chinese local governments often draw much of their revenue from the sale of land, rather than from taxes. The report urges that Chinese social spending be funded more by dividends from state-owned firms and by property, corporate and other taxes.
Shares of Anil Agarwal-led Vedanta group company Sterlite Industries and Sesa Goa are in News .
Here are few reasons/Views behind the Restructuring of the stocks.
1) Lack of clarity about a restructuring exercise: Media reports indicate that Vedanta Resources (VED) may restructure holdings in group companies. "Vedanta's stated strategy is to simplify and consolidate its corporate structure. Management reviews options to deliver this strategy on an ongoing basis and will update the market as appropriate," the company has said in a statement.
2) Restructuring per se will not impact valuations of the VED Group but valuations assigned to various assets will determine whether value stays at Sterlite or shifts to the parent company, brokerage firm Kotak said in a report. Citing media reports, Kotak says three restructuring scenarios are possible.
3) Vedanta may merge Sesa Goa with Sterlite: Sterlite is reportedly in talks with the government to acquire 49 per cent stake in Balco and 26 per cent stake in Hindustan Zinc (HZ). Sterlite does not have sufficient assets to fund this acquisition. Sesa's cash flow and the debt leverage it can provide can potentially aid acquisition of HZ stake and Balco stake. Such a scenario is neutral at a fair merger ratio, Kotak says. Besides, this might indicate lack of avenues for strategic utilization of Sesa's cash, the brokerage firm adds.
4) Merger of Sesa Goa and complete ownership of Vedanta Aluminium (VAL). This could be negative in case Sterlite has to assume the entire debt of VAL. Fair value impact in such a case could be Rs. 35 per share, Kotak says.
5) Sterlite becomes the holding company for all VED assets excluding KCM: Negative if Sterlite assumes VAL's entire debt. "We compute impact of Rs. 40 per share on Sterlite's fair value with the assumption of (1) merger ratio of 1:2 between Sterlite and Sesa Goa, ratio of market price before speculation of restructuring, (2) acquisition of 40% stake of VED in Cairn India at CMP of Rs390/share and (3) Sterlite assumes VAL's entire debt and does not pay equity value," Kotak says.
6) This value shift can be prevented if (1) VED assumes part of the debt (even if it transfers the entire ownership in VAL), or (2) compensates Sterlite through a favorable merger ratio of Sesa, though Sesa shareholders may object, or (3) sells its stake in Cairn India at a discount to the market price to ensure that Sterlite's minorities are not impacted by any restructuring plan, the brokerage firm adds.
7) Of particular note will be whether value shifts from Sterlite to VED or stays with Sterlite, Kotak notes. This will be determined by the valuation exercise for VAL, a company with combined debt (internal and external) of US$5.5 billion but EBITDA potential of US$200-300 million (without bauxite and captive coal).
8) The Ministry of Environment and Forests rejected VAL's application for the bauxite mine and stopped the expansion phase of the alumina refinery. This has impacted the existing operations and expansion projects. It has a highly leveraged balance sheet (Rs. 276 billion of debt at the end of December 2011 and is essentially surviving on corporate guarantees given by VED and Sterlite. It is difficult to be sanguine on VAL's operations.
10) The management has highlighted its intent to resolve equity holding of Vedanta by March 2012. Dual listing structure is in the offing. Expected structure reduces risk for Sterlite. Merger ratios scenario analysis indicates Sterlite is well below worst case, Macquarie said in its report.
