Pause for thought

Source: Reuters/Jitendra Prakash Indian women plant rice plants in their field in Malaka, in the northern Indian city of Allahabad. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. This year’s India report comes at an especially challenging time for the world’s second most populous nation. The near-20% slump in the rupee is the most obvious symptom of the crisis of confidence buffeting the country, and also one that risks making things worse by eroding unhedged balance sheets and importing inflation. Comparisons with India’s balance-of-payments crisis in the early 1990s are becoming more commonplace. The situation today is not yet as serious, but India risks falling into a full-blown fiscal crisis if it cannot reverse the outflow of investment. From a capital-markets perspective, it’s not hard to see how India has ended up in such a precarious position. In many respects, India is its own worst enemy, with a long-standing habit for self-defeating policies and contradictory regulations. The confusion that followed last year’s withholding tax cut on overseas bonds and the rupee’s reaction to tightening measures from a panicking central bank are just two of many such examples. Similarly, pushing borrowers overseas to relieve pressure on the currency means little without a meaningful review of cost, size and tenor restrictions under the external commercial borrowing regime. India’s problems are well documented. While this report cannot ignore the reality, it also aims to analyse potential solutions that can help lift India out of its present predicament. The financial markets certainly need to develop further, and recent measures show some welcome recognition that the lack of depth in the domestic bond market is a serious shortcoming. However, a straw poll of market participants confirms that funding is far from the country’s biggest hurdle. Debt finance remains available for capital expenditure, and even the biggest projects have successfully secured funding in recent months. Overseas bond markets remain open – albeit at a price – and local equity markets have begun to respond to the government’s efforts to restore confidence. The rupee, too, has recovered some ground after plunging to a record low against the US dollar. Many of India’s biggest challenges are self inflicted, the result of cumbersome regulations and a bloated bureaucracy. Implementing structural changes will not be easy, but the latest market rout may prove the ideal backdrop for the government to push through long-overdue reforms. If India can address policy and structural issues, this challenging period could prove to be one of the best times to invest.

Source: Reuters/Jitendra Prakash A Hindu devotee lights an earthen lamp on the steps of Sindhiya Ghat during the Karthik Purnima and Dev Diwali festival in Varanasi. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. While India is no longer a sure bet on rapid growth rates, the world’s second most populated country is still home to sector-specific investment opportunities that offer value during periods of currency depreciation or low points in the business cycle. India’s recent macroeconomic woes are well documented. Since May, the rupee has slid 20% and political anxieties have festered, putting investors on watch and policymakers on crisis footing. Although India’s economic fundamentals remain stronger than the rupee exchange rate suggests, the economy as a whole is unlikely to return to double-digit growth anytime soon. Global investors had tentatively retained their confidence in India’s long-term economic prospects until Federal Reserve chairman Ben Bernanke began talking in May of tapering the US monetary stimulus, prompting a stampede out of emerging market assets. Nonetheless, the future is not all doom and gloom for investors seeking returns in India’s growth trajectory. Some sectors will benefit from a depreciation of the rupee, while demand in other sectors may override cyclical variations. “The market pendulum has clearly swung from greed to fear,” said Kunal Shroff, managing director at ChrysCapital, one of the largest India-focused funds with US$2.5bn in assets under management. “This will offer some great opportunities over the next one to two years to patient, long-term investors.” “People think there’s been some massive structural deterioration when it’s mainly a cyclical phenomenon.” Shroff said information technology, pharmaceuticals, consumer goods, and potentially, financial services were among the most attractive sectors. “Clearly export-orientated things work, especially IT and to some extent pharmaceuticals, which also works on the domestic side.” Indian assets have taken a particularly hard hit from worries that the Syrian crisis will drive up the costs of oil imports – now paid for in more expensive US dollars – coupled with uncertainty over state elections later this year, and national elections expected in April 2014. Markets are now fixated on a negative feedback loop between the plummeting rupee and worsening fundamentals – including higher inflation, a rising fiscal deficit and the need to service higher dollar-denominated external debt. Although a few sectors, such as IT and pharmaceuticals, stand to benefit from these woes, hope may also come from unusual sources – such as Mother Nature herself. “So, what can happen? Look up to the gods, they’ve been kind this year and we’ve had good rains,” said Dharmakirti Joshi, chief economist for Indian rating agency Crisil. Strong monsoons should raise rural income, provide a mild push to rural demand, and, to some extent, moderate food price inflation. However, these trends would not be a cure-all for the Indian economy overall, Joshi warned. “The outlook for the currency remains weak since agriculture alone cannot offset the headwinds coming from industry and the services sectors,” Joshi said.Cyclical versus structural In the face of a seemingly endless flow of negative news and data, analysts have slashed Indian growth forecasts to the 4% or even 3% range. Yet, Robert Prior-Wandesforde, director of Asian economics research at Credit Suisse, is holding firm for the moment with a 6% forecast, citing exaggerations on both sides of the equation: neither was India a structural miracle during the good times, nor is the economy in a state of collapse now. “When you get a country with two or three years of unusually strong growth, particularly combined with low inflation, you get people proclaiming a structural miracle, but what is actually happen

Source: Reuters/Babu Students make a formation of a tree during a programme to create awareness to save trees and forests. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. India’s central bank wants to introduce innovation and competition through new banks so as to breathe life into the country’s financial sector. It is a scheme that has worked before, but, as the economy stumbles, the regulator is not making it easy for potential lenders. Much of India’s modern private banking sector, including four of the current five most active lenders, has its roots in earlier rounds of licences the Reserve Bank of India granted in 1993 and 2003. This year’s process attracted 26 new applicants before the July 1 deadline. Results are expected in January, but it is still unclear what exactly the winners will be winning. The opportunities appear very different than when incumbents, such as Yes Bank, ICICI Bank and Axis Bank, won licences. Indian dealmakers are looking to the May general election as a key inflection point in the country’s return to economic stability, if not strength. Yet, whichever way the post-election markets pan out, the conditions in the banking market will remain challenging. New banks have a lot to contend with. Previous private sector licensees were able to grow rapidly in targeting large urban areas. This time, however, the regulator is requiring newly licensed banks to focus on rural areas. Banking penetration is low in rural India, but accessing clients there costs more money and time than it does in cities, according to analysts. “It is important to realise that the challenges are different now,” said Saswata Guha, director at Fitch Ratings in Mumbai. “The guidelines are far more stringent. It seems clear that the regulator means business.” Previous banking applicants did not have it all their own way. Most of the 10 new banks set up in 1993, for example, have been merged into other institutions or have been rebranded. Most applicants in 2003 did not even have a chance because, of about 100 applications, RBI awarded only two permits. The RBI will be at least as strict this time, analysts say, with demands on profitability, capital adequacy and growth for the new banks. Those prerequisites alone limited the number of new banks that applied. “A candidate needs the capital wherewithal to comply with rules and, also, to have a certain standing in the space,” Guha said. “All of this means only serious contenders can apply. Looking at the 26 names, only a few could probably comply with the requirements, maybe five or six.”Serious capital New banks are required to open one in four branches in rural areas and meet statutory reserve requirements. Lenders must place 4% of deposits with the RBI and hold 23% in government bonds from the start. Banks are also obliged to maintain up to 40% of their net bank credit as loans to priority sectors, such as agriculture, education and housing. Still, the interest of the 26 hopefuls suggests a belief in India’s long-term prospects, despite current political and regulatory gridlock. Only around half of all Indian households currently have access to banking services and, as the economy grows, so will demand for more sophisticated and expensive services. The world’s second-most populous country still has solid longer-term growth prospects. The IMF projects GDP growth of 5.68% this year, 6.23% in 2014 and 6.63% in 2015. That will represent the type of economic rebound that banks thrive on. The Indian economy grew only 3.99% in 2012, a significant drop from 7.75% in 2011 and 11.23% in 2010. For these predictions to come true, however, India’s policymakers have their work cut out for them. “There is a broad consensus that a lot has to be done quickly to improve India’s economy,” said Geeta Chugh, credit analyst at S&P, based in Mumbai. “We forecast 5.5% GDP growth this fisca

Source: Reuters/Danish Ismail A motorcyclist from the Kashmir Police rides through a ring of fire during Independence Day celebrations in Srinagar. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. After a summer struggle to put a floor under the rupee, India has found there is no single solution to its crisis of confidence. While short-term measures can help restore stability and ensure the capital markets remain open, policymakers also need to address a number of structural problems if they are to convince the world that India is still an attractive investment destination. IFR asked market participants to propose the most effective measures the government and regulators could take to improve the outlook for India. The responses received include short-term and long-term proposals, targeting both the country’s financial position and investor sentiment. “A focused approach to streamline investments in the power, roads and telecom sectors, which cumulatively account for two-thirds of five-year plan expenditure, would aid a quick revival in investment spending.” The following list of 10 recommendations offers a snapshot of the capital markets’ main concerns, and ways to address the problems.1. Restart stalled projects Kick-starting many stalled infrastructure projects will serve the dual purpose of stimulating domestic investment and restoring confidence in the policy framework. Land acquisitions and environmental clearances need to be faster and, towards this end, investors have hailed as a step in the right direction the government’s recent plan to fast track around 40 projects worth over US$15bn. “A focused approach to streamline investments in the power, roads and telecom sectors, which cumulatively account for two-thirds of five-year plan expenditure would aid a quick revival in investment spending,” said Anup Bagchi, managing director and CEO of ICICI Securities. Structural problems also need to be addressed, before many of the stalled power projects can be restarted. Officials need to be more open to revisions to power-purchase agreements, while being careful not to give sponsors blank cheques or invite lawsuits from losing bidders. “Some stringent covenants may be stipulated, such as a reduced return on capital, non-distribution of dividends for, say, 10 years or disqualification from bidding for new contracts for, say, five years. These measures should be substantive and punitive in nature and not merely symbolic,” said Atul Joshi, managing director and CEO of India Ratings and Research.2. Simplify overseas borrowing rules Restrictions on external commercial borrowings may have protected some Indian companies from building up unmanageable foreign currency liabilities, but they also leave borrowers with fewer funding options in times of stress. Regulators need to consider steps to liberalise foreign currency funding, such as reducing the minimum tenor on ECB financings to three years from the current five or seven years, raising the cap to US$1bn from US$750m and allowing companies to refinance existing overseas loans without the need for additional approvals from the central bank. A review of margin caps will also allow a wider universe of companies to access overseas funds, helping relieve some pressure on the currency. “Creating an environment where the market determines the pricing risk of ECBs, like what has been done with refinancing of ECBs, albeit within the limits of overall caps, provides for a more simple and transparent pricing system,” said Sameer Chandra, director, loan syndications, at Citigroup. India should also allow more companies to refinance rupee loans in the overseas markets, potentially with the use of credit-enhancement or asset swaps, in order to access deeper pools of liquidity. “Offshore branches of Indian banks, among other offshore lenders, are liquid on G3 currencies, and can tur

Source: Reuters/Sivaram V An employee works on his laptop at the Start-up Village in Kinfra High Tech Park in the southern Indian city of Kochi. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. Growing volumes in recent years have offered a hint of the potential for India’s domestic bond market, but investors believe the government needs to do more to promote this vital alternative to bank financing. The rupee bond market registered deals totalling US$29.3bn-equivalent in the year to September 4, according to Thomson Reuters data. That compares well with the US$46.0bn for calendar year 2011, but a recent slump in deal flow amid turmoil in local interest rates means it is on track to fall short of the US$54.4bn issued in 2012. This slowdown in bond financing also comes at a time when India urgently needs to relieve some of the pressure on its banking system, where infrastructure commitments and rising non-performing assets have left balance sheets stretched. To get bond growth back on track, observers are calling for measures like removing certain investment restrictions, enhancing transparency, widening the investor base and tweaking the insolvency regime. The real challenge, however, remains the development of a deeper market that can provide funding for lower-rated issuers and longer-term assets. Compared with other countries, India’s local market remains woefully underdeveloped, with rupee bonds equalling just 13% of the country’s GDP. The US bond market, the world’s biggest, is equivalent to around 130% of the country’s GDP, while South Korea boasts a domestic debt market equal to around 80% of GDP. “The rupee corporate bond market is not growing to its potential because it still remains dominated by a few issuers (and investors), who are highly rated,” said TCA Ranganathan, chairman and managing director of Export-Import Bank of India. Exim India raises around US$4bn each year across the onshore and offshore debt capital markets.Changing dynamics The last few months, however, have seen some pivotal changes in the market. In May, India launched online trading for domestic corporate bonds, a long-awaited service expected to add depth to the market. The Securities and Exchange Board of India had pushed for an online exchange in January, asking stock exchanges and clearing houses to use online trading for all debt instruments, including corporate bonds, government securities and securitised debt. The National Stock Exchange, India’s largest bourse, was the first to launch the service in May with the Multi-Commodity Stock Exchange following suit in June. The use of online-trading technology has put India on par with other advanced global markets that have implemented low-touch exchanges. Still, take-up has been slow, and Sebi is looking at ways, such as improving settlement procedures and introducing standardised documentation, to enhance the trading platform to gain more traction. Market players also suggest that state-owned banks, the key investors, should be encouraged to participate more actively in the secondary market for corporate bonds, as is already the case in government securities. Banks buy more government bonds as these can be included in statutory liquidity requirements, while corporate bonds have yet to be included in that calculation. The government has also been encouraging some big public sector entities to issue bonds under a single ISIN code to help to build a yield curve. Indian issuers, typically, shy away from reopening their existing issues because they fear doing so will bunch up the maturities. However, more importantly, industry experts say pension funds and insurers need to participate in the bond markets more actively. Take, for instance, the Employees’ Provident Fund Organisation, the largest investor with an investible corpus of approximately Rs5.46trn. (US$84.9bn). Earlier in the ye

Source: Reuters/Fayaz Kabli A man holds tweezers while repairing a watch at his workshop in Srinagar. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. State Bank of India, along with investment banking arm SBI Capital Markets, has been the world’s biggest arranger of project-finance loans each year since 2008. Volumes, however, are falling and others are catching up. Project financings in rupees totalled US$42.2bn-equivalent in 2011, US$19.8bn in 2012 and US$15bn so far in 2013, according to Thomson Reuters data. Shrinking loan volumes pose a conundrum for India as it attempts to channel an ambitious US$1trn into infrastructure in the five years from April 2012. Macroeconomic challenges, flight of foreign capital, and a slumping rupee are clogging the investment cycle further. India desperately needs to get its infrastructure plans back on track. According to Reserve Bank of India Deputy Kovernor KC Chakrabarty, only 10,690km of the 50,621km of planned road projects were awarded in the last five years, and only four of 16 planned ultra-mega power projects planned. Of the 251 oil blocks allotted, 110 had reported discoveries, but only six were actually operational, Chakrabarty said at the Annual Infrastructure Finance Conclave that SBI Capital Markets hosted in Agra last month. Non-performing and restructured assets in the infrastructure sector have grown rapidly to Rs1.37trn (17.43% of total advances to the infrastructure sector) at the end of March 2013 from Rs 121.90bn (4.66%) at the end of March 2009, according to Chakrabarty. “India needs to double its infrastructure spending to around 10% of its GDP to achieve over 9% GDP growth, which further requires new funding sources,” said a foreign investor, who recently cut his exposure to the country. “A few years ago, corruption was used to do business, now business is corruption. The moral fabric is totally broken in the country and, no wonder, India surfaces in the 132nd position among 185 economies in the ease of doing business globally.” Foreign investors may have less patience, but they are not alone in facing challenges. Reliance Industries, the Tata Group, GMR and GVK have all faced delays to major projects, some choosing to walk away from their concessions altogether. Bankers, however, are quick to point out that they remain able and willing to finance the right projects. Indeed, GMR and GVK each cancelled road concessions long after securing funding for the projects. “To say that the infrastructure sector has lost the confidence of investors and lenders is not entirely correct. Yes, we are still struggling with huge shortages of infrastructure everywhere and there is a lot of catching up to do, but it is also a fact that macro issues can be solved easily and political will both at the centre and state level is capable of taking Indian infrastructure development to the next level,” said Rajat Misra, senior vice-president in the infrastructure group at SBI Capital Markets.Funding options Indian banks are still lending, albeit selectively. However, India will need a wider range of funding sources to meet its infrastructure targets without overburdening the already-stretched banking sector. Focusing on getting additional more long-term foreign direct investment will help. “With government departments working against each other, this is not possible. A business needs to be communicated on what it needs to do to obtain clearances and, once it has taken those actions, clearances must be given promptly,” said another Singapore-based investor. Bank lending to infrastructure sector currently stand at US$120bn, or around 35% of total such loans to the industrial sector. So, not only do long-term fixed-rate products like senior bonds need to be introduced immediately, but there is also a need to develop interbank interest rate swap market for hedging interest-rate risk

Source: Reuters/Babu Indian students hold special shields to view the annual solar eclipse over the southern Indian city of Chennai. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. India introduced a safety-net mechanism to bring back retail investors to the near-dead primary equity markets, but has not been able to test its efficacy as the economic slowdown is keeping away both issuers and investors. “It’s a mechanism that would have ideally provided some comfort to retail investors. However, currently primary markets like the secondary markets are in a state of inactivity because of the economic slowdown,” Jagannadham Thunuguntla, head of research at SMC Global Securities. The justification of the Securities and Exchange Board of India for the mechanism is a desire to boost confidence in new listings after a series of disappointments. Of the 117 new stocks listed between 2008 and 2011, 72 were trading below their issue prices six months after going public. Of those 72, 55 had lost more than 20% of their IPO prices. Market participants said the safety-net scheme targeted only retail investors, who typically bought 10%–15% of any Indian IPO. The scheme is unlikely to make life easy for issuers that are finding few buyers for Indian equities from any investor base. “Equity is all about risk taking and a regulator should be the last one to decide how much risk an investor can take.” Under the scheme, a company will have to buy back shares from retail investors if its stock trades below the IPO price six months after listing. The safety-net period runs for 180 days from the date of listing, and the buyback is triggered if the volume-weighted average market price of the shares during the last 60 trading days of that period is below the allotment level. The scheme is available only to retail investors, who have retained all or a portion of their IPO shares, and not those who bought in the market afterwards. Sebi has been insisting on a safety-net mechanism, particularly in those instances where it feels the valuations are expensive. However, bankers question the market regulator’s wisdom. “Why should companies provide protection to the wrong set of investors? If an investor is so risk averse, he should be buying debt or mutual funds and not IPOs. Equity is all about risk taking and a regulator should be the last one to decide how much risk an investor can take,” a banker said. Directory search provider Just Dial first implemented the scheme for its Rs9.3bn (US$145m) IPO in May. The company priced the retail tranche of its 17.5m-share IPO at Rs483 each and the institutional portion at Rs530. At the time of the IPO, some investors felt that Just Dial was also expensive at a forward price-to-earnings ratio of 29. The stock, however, has done well since listing on June 5 and the chances of a share buyback look remote at present. The stock closed at Rs706.45 on September 5. Its all-time high was Rs737.10 and low was Rs605.15. Citigroup and Morgan Stanley were the bookrunners. Just Dial’s IPO was India’s biggest since Bharti Infratel’s US$752m listing in December, which disappointed in the aftermarket. Although Sebi had not formally required a safety-net provision for retail investors, bankers said, going forward, it planned to insist on a provision for all IPOs and the blueprint for it would be the mechanism Just Dial implemented. Bankers have also criticised the current safety-net mechanism, where it is triggered at any level below the IPO price. An earlier discussion paper said the safety-net provision should trigger only in cases where the price of a share depreciated more than 20% from the issue price. Furthermore, the 20% depreciation shall be considered over and above the general fall, if any, in the benchmark index. “The current safety-net mechanism doesn’t provide for the broad market moves, which any local or int

Source: Reuters/Punit Paranjpe Commuters wait as a train approaches a railway station in Mumbai. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. The South-East African nation of Mozambique may seem an unlikely setting for a ground-breaking shift in Indian financings. Two years ago, however, an oil-and-gas project in the Rovuma basin helped kick off a trend that has breathed new life into the offshore loan market. Videocon Industries, better known as a consumer electronics maker, turned to credit enhancement in June 2012, when it obtained standby letters of credit amounting to US$2bn from Indian banks to fund its offshore capital expenditure plans in the oil-and-gas sector, including those arising from a 10% stake it owned in Rovuma, off the coast of Mozambique, and a stake in oil-and-gas fields in Brazil. Videocon’s exercise was not necessarily innovative. SBLCs have long been a part of the world’s capital markets. However, Videocon’s deal became a path-setter few would have anticipated, providing a template for similarly rated or lesser credits from India to access international liquidity. In the months that followed, a slew of borrowers from India, including state-owned Bharat Petroleum Corp, joined the party to raise some US$2.25bn from SBLC-backed loans. “SBLCs and loans backed by these instruments are popular in times of tightening liquidity and market volatility as they provide wider market access, especially to non top-tier borrowers,” said Aditya Agarwal, head of loan markets, Asia Pacific, at RBS. Indeed, the response to Videocon’s first SBLC-backed deal, mandated to Deutsche Bank, underscored the popularity of credit-enhanced deals. The US$200m deal came with a tenor of two years and 11 months, and was also the first of the credit-enhanced loans from India in 2012. When the facility did close in November, it had attracted 13 other banks and doubled in size to become one of the most successful syndicated loans of the year. Following soon after was Bharat Petroleum, which closed a US$700m SBLC-backed financing of three and five years in early December. Bharat Petroleum was also raising funds to finance its capex requirements in the Rovuma basin as it also owns a 10% stake stake in that oil-and-gas field. “Borrowing through an SBLC-backed financing usually has a positive impact on the credit ratings of such borrowers; resulting in a lower cost of funding for them, as well,” said Agarwal. This is evident from Videocon’s SBLC-backed deal, which paid 350bp top-level all-in based on a margin of 300bp over Libor. More importantly, it helped Videocon raise much-needed funds and at a cheaper cost than would have been possible without an SBLC guarantee or credit enhancement. The borrower’s last visit to the offshore loan markets was in April 2007, when it borrowed US$75m through a 3.4-year loan paying a top-level all-in of 119bp, based on a margin of 100bp over Libor. That deal was secured by account receivables. While the pricing on that deal was tighter than Videocon’s SBLC-backed financing, it was transacted in a different era, when appetite for Indian paper was far stronger. SBLC-backed financings would have been the ideal funding instrument during and in the aftermath of the global financing crisis of 2008, but again appetite for FI risk was low. “Between 2008 (after the global financial crisis) and 2010, demand for Indian credits was low among foreign lenders and offshore borrowings were also more expensive compared with domestic funding. As such, there was not much need for SBLC-backed financings for Indian borrowers,” said Birendra Baid, head of loans origination at Deutsche Bank. Moreover, Indian banks were also not open to the idea of issuing SBLCs as the loans backed with these instruments competed with their own primary debt issuance, Agarwal pointed out. “Until March 2012, Indian banks were raising bo

Source: Reuters/Ajay Verma A labourer stands outside a Tata Steel stockyard in the northern Indian city of Chandigarh. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. As the world economy plods towards a slow and protracted recovery, Tata Steel is finding salvation at home in India. It has been an eventful summer for Tata Steel. With a non-cash write-down of goodwill and assets to the tune of Rs 83.56bn (US$1.6bn), the company finally came close to a public admission of pricing and timing issues with its high-profile acquisition of Corus Steel more than five years ago. The impairment charge goes some way to wiping the slate clean early in the tenure of new Tata Steel chairman Cyrus Mistry. Steel demand in Europe, in aggregate terms, is down almost 30% since Tata Steel paid US$13bn to take over Corus in 2007 and a rerating of cash-flow expectations from the European business shifts the spotlight back on the company’s Indian expansion. The Corus legacy is, however, far from wiped out, with nearly half of Tata Steel’s operating profit used to service net debt of close to Rs600bn as of June – most of it related to the acquisition. More financing is in the pipeline as the company undertakes an unprecedented expansion of its Indian operations – a near doubling of capacity in a span of five years. On top of a brownfield expansion in Jamshedpur that will add 2.9m tonnes per annum, the company is already working on the first phase of a 3mtpa greenfield development in the eastern coastal Indian state of Odisha. Tata Steel Odisha’s Rs228bn local currency project financing will be drawn over the next five years and is to be repaid over 12 years. The crucial financing is one of the largest such package, on record in India. “Financing for the Odisha project was a specific risk to the group, given the volatility in the global financial markets and the availability of credit,” states the latest annual report. Despite tying up the funds, the company has not drawn down on the credit lines so far. It has spent over Rs95bn so far with nearly Rs20bn in the April–June 2013 in Odisha. It has used internal cash generation to support the capital expenditure and that possibility is likely to accelerate as the impact of the brownfield expansion is felt. Mumbai-based independent analyst Arun Kejriwal believes the Odisha project is critical for Tata Steel. “It is a significant ramp-up on a new site and it is the first major project due for delivery under chairman Mistry,” he said. Given the fate of other metals-and-mining projects in India, there has been some apprehension about the execution of this project. So far, the Tatas seem to be getting their basic steps right with land and construction approvals, helping convince domestic banks to lend to the company. For KR Kamath, chairman and managing director of Punjab National Bank, the jumbo financing proves there is no lack of funds for projects with requisite approvals and sponsors with established track records. The rupee depreciation of almost 20% since April, debt revaluation and more expensive imports add to the challenges facing the company. Given its heavy debt profile, rating agencies are keeping a close watch on its finances, but Tata Steel has shown itself to be adept at securing funds from a variety of sources. “Financing for the Odisha project was a specific risk to the group, given the volatility in the global financial markets and the availability of credit.” Finding a market window in April, the company raised S$300m (US$236m) from its first Singapore dollar bond issue at an unusual 10-year maturity. As of the end of June, the company reported a comfortable liquidity position of over Rs171bn against capex of Rs37.64bn. India Ratings and Research has Tata Steel’s AA rating on a negative outlook, and is watching for any change in the company’s net debt-to-Ebitda ratio. A decisi

Source: Reuters/Ajay Verma An Indian girl walks on a rope during the Festival of Gardens in northern city of Chandigarh. To see the digital version of this report, please click here. To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com. A cash-strapped government, political and trade opposition and an extremely volatile equity capital market make the Indian Department of Disinvestment’s job of selling shares of state-owned companies a very challenging task. So, it is not an exaggeration to say that Ravi Mathur has done a good job of selling the Indian Government’s stakes in state-owned companies since taking over as head of the department in January. For the 2012-2013 financial year to March 31, the Indian Government raised a record Rs238 bn (US$3.6bn) through a programme that picked up steam in the second half of the year. It has set a target to raise as much as Rs400bn from the disposal of its interest in state-owned companies and Rs140bn from selling stakes in selected private companies in 2013-2014. Two factors, such as paying heed to market conditions and selling the stakes to a wider investor base, have been keys to the department’s success. After attempting to complete a Rs124bn Oil & Natural Gas Corp offer for sale at premium to the traded price in March 2012, the department launched similar divestments at reasonable prices at discounts ranging from 5% to 71%. “We regularly meet investors and give them the confidence that they are investing in good public sector companies with strong fundamentals,” Mathur said in an interview. Market feedback and concerns have also prompted the government to delay any offers for sale under the disinvestment programme until the Indian rupee stabilises against the US dollar. “We would like to watch for one or two months before launching any offers for sale. We cannot sell large chunks of equity in this type of market. Last year, the major disinvestments happened when the markets offered a window,” Mathur said. The government was planning to launch offers for sale totalling a maximum US$2.2bn in Coal India and Indian Oil Corp. The premarketing of the Indian Oil stake was to start in September, but was pushed back. The disinvestment programme is not without its critics. Two criticisms particularly stand out. The first is that the government leans on state-owned insurance companies to buy any unsold shares, effectively bailing out its disinvestment programme. The second is that, in selling shares of state-owned companies at sharp discounts to bridge its fiscal deficit, the government is eroding the values of existing shareholders. Mathur, however, argues that allotments at offers for sale have been purely a function of market demand. In some of the popular offers for sale last year, state-owned Life Insurance Corp of India received no significant allocations. “Investors invest when they like a company. In the Oil India OFS, LIC didn’t get any allotment and, in the NTPC OFS, it was allotted shares totalling Rs20bn, despite bidding for Rs60bn,” Mathur said. Data from the government shows that foreign institutional investors accounted for 39% of the Rs238bn of shares sold in 2012-2013, while state-owned entities brought 35%. As for the charge that the government sold shares at sharp discounts, Mathur said these were given only in stocks where the liquidity was extremely low and the traded price was not a reflection of the actual worth of the company. The department is also looking at other ways to raise funds for the government besides share sales. It plans to raise up to Rs50bn through an Exchange Traded Fund for shares of listed public sector companies. Mathur said 12 to15 from the total 48 listed state-owned companies will be part of the ETF. Goldman Sachs Asset Management is the AMC for the ETF. With share prices quoting at a steep discount the government is not averse to asking cash rich state-owned companies to buy back their shares, Ma