Dubious firm takes Mauritius route to invest in India

Tax haven funds: Govt shuts one door, opens another

J Gopikrishnan


A little over a year after it clamped down on flow of money
into the country from tax havens abroad, the UPA
Government has once again opened the country’s doors to ‘dubious’ funds.

The Cabinet Committee on Economic Affairs (CCEA),
in its last meeting on October 1, cleared a twice-rejected
proposal of the Foreign Investment Promotion Board (FIPB)
for bringing in $135 million (Rs 650 crore) from Mauritius to
a Bangalore-based firm.

The application submitted to FIPB by Forum Synergies (India)
PE Fund Managers Private Ltd to receive the “contribution”
from the Mauritius-based India Knowledge-Manufac-turing
Company was rejected twice after objections by intelligence
agencies. According to sources, the agencies had raised doubts
on the ownership pattern and fund sources of the Mauritian firm.

The revenue department too had reservations that the proposal
may involve an alleged “treaty shopping”.
‘Treaty shopping’ refers to taking advantage
of the double taxation avoidance agreement by
routing an investment through Mauritius.

The FIPB had first rejected the proposal on August 8, 2008,
at its meeting chaired by then Finance Minister P Chidambaram.

The CCEA Press release on the latest meeting cleverly sidesteps
the funds’ Mauritian origin. “The CCEA approved the proposal
of Forum Synergies (India) PE Fund Managers Pvt Ltd to accept
contribution up to $135 million from India Knowledge-Manufacturing
Company under the foreign direct investment route and to
issue Class B units and Class C units of Forum Synergies
India Trust to the Knowledge-Manufacturing Company,” the release said.

After several controversies on fund flow from tax havens
like Mauritius, Cayman Islands, Guernsey Islands and
Cook Islands, the Government had been shelving proposals
for investment from these countries.

Samir Inamdar, Sudhir Kant and Prasant Goyal head the fund
acceptor firm, Forum Synergies.

The company also has an office in the US.

But hardly any details of the Mauritian firm are
available in public domain.

Despite an extensive search, one could not find any
trace of the ‘India Knowledge-Manufacturing Company’.

In May last year, the CCEA had cleared Agam SPV Six Ltd,
a firm in Cayman Islands, for investing Rs 1,300 crore
in airport development in India.

After The Pioneer’s expose on irregularities of the approval,
FIPB ordered an inquiry and the project was later shelved.

Norms for highway projects pact changed

Mihir Mishra

The threshold limit in the conflict of interest clause in the model
concession agreement (MCA) for highway projects has been increased
from 5 per cent to 25 per cent, which was recommended by
the B K Chaturvedi Committee, set up to find ways to expedite
various road projects in the country.


This will allow any two special purpose vehicles (SPVs) with a common
partner having up to 25 per cent stake for bidding for the same project.

Earlier, any two SPVs in which any developer had more than 5 per cent
shareholding each were barred from bidding for the same project.
It was increased to 5 per cent in July this year from the earlier 1 per cent.

Among other recommendations which have been accepted are the
introduction of an ‘exit clause’, removal of termination clause,
no forfeiting of security money deposited by the bidders
if they are not present at the time of bid opening, and
constituting an empowered group of ministers to clear stalled projects.

The exit clause allows the lead partner in an SPV to exit by selling its
stake after the construction of the project is over.

Earlier, it was mandated to stay till the completion
of the concession period (ranging from 20 to 30 years).

The ‘termination clause’ allows NHAI to take back tolling
rights from a concessionaire anytime before the concession
period is over, if the concessionaire has recovered its investment on the project.

However, the Cabinet Committee on Infrastructure (CCI) has
sent back the recommendations on finances to the Planning Commission.

“The CCI did not accept the committee recommendations on the financing side.
All such recommendations have been sent back to the Planning Commission,”
said a source in the ministry, who did not wish to be named.

The committee’s recommendation on financing included providing sovereign
guarantees on loans that the National Highways Authority of India raises from the market.

Headed by Planning Commission member B K Chaturvedi, the committee
also comprises Road Secretary Brahm Dutt and Finance Secretary Ashok Chawla.

The committee will also begin working on the second part of the report.
This will deal with a new dispute resolution mechanism, providing financing
to road builders and making changes in the company law
to make the special purpose vehicles more powerful.

Power projects face delay over profit sharing, location

Utpal Bhaskar


Three large power projects with generation
capacities of 4,000MW each face delays following
objections from state governments over issues such
as profit sharing and location.

The proposed plants in Orissa, Tamil Nadu and Chhattisgarh
are part of the Union government’s ambitious plans
to set up large power generation capacities through
its ultra mega power project (UMPP) scheme.

The government had aimed to issue requests for
qualification (RFQs) for these projects at Cheyyur
(Tamil Nadu), Bedabahal (Orissa) and Akaltara
(Chhattisgarh) in 2009-10.



Ambitious plans: Power secretary H.S. Brahma said
there were issues and added that state govts had to
cooperate to finish projects on time. PIB
“While the Tamil Nadu tourism ministry has objected
to the project site, the Orissa government wants a
sharing in the annual profits of the developers to
the tune of 5% per annum. How is this possible?”
said a senior government official.
“In the case of Akaltara, a new water reservoir
has to be built to provide water linkage to the project.
Given these problems, no UMPPs can be awarded this year.”

The official did not want to be identified.

Power secretary H.S. Brahma confirmed there were
some issues with these projects but said,
“These problems will be sorted out...
The state governments’ cooperation is
very necessary for the projects to go ahead
within a given time frame.”

UMPPs follow a competitive tariff-based bidding
in which a special purpose vehicle (SPV) is set up
to reduce risk perception and increase investor confidence.

This SPV takes care of regulatory requirements such
as land acquisition and environmental clearances
and transfers these to the winning bidder.
Each project requires an investment of Rs16,000-20,000 crore.

The UMPP scheme has had its share of problems;
projects at Girye in Maharashtra and Tadri in
Karnataka had to be abandoned due to local resistance.

Satnam Singh, chairman and managing director at
Power Finance Corp. Ltd, the nodal agency for
awarding the projects, maintained that the RFQs
would be issued in the current fiscal year.

“The RFQs will be issued in this financial year.
If some issues come up they will be resolved as
has happened in the past. There are so many
involved in the process and these issues are being
at the highest level,” Singh said.

UMPPs are critical to the Congress-led United
Progressive Alliance government’s efforts to enhance
the country’s power generation capacity to fuel the
needs of an expanding economy. Currently, India
has a power generation capacity of 150,000MW
and expects to add 78,577MW by 2012.

Of 14 such UMPPs planned, the government has
so far awarded four projects. Tata Power Co. Ltd
has won the Mundra UMPP in Gujarat and
Anil Ambani’s Reliance Power Ltd the projects
at Sasan in Madhya Pradesh, Krishnapatnam in
Andhra Pradesh and Tilaiya in Jharkhand.

“There is a struggle to move the concept beyond a
first few projects. The challenge, which is emerging
in these large projects, is that something will have
to be sacrificed to get these projects moving,” said
Gokul Chaudhri, partner at consultancy firm BMR Advisors.

“The country needs to take a decision about
what it is willing to sacrifice in its list of priorities
to get the much required power in the country.
The question is how to reach that balance?
An ideal situation that involves no environment
cost doesn’t exist,” he added.

Not Interested-Banks are flush with funds but why are they reluctant to give loans?

Shekhar Ghosh


LAST month, an Aurangabad-based engineering firm
received a query from a Thai export house about
a large consignment of alloy gaskets.

Some three years ago, a spate of similar orders
had forced the company to import brand
new machinery worth Rs 20 crore.

Almost the entire cost was borne
by bank borrowings.
Then came the slowdown in both
export orders and domestic demand:
the company has been unable to repay
even the interest on the loan every year.


Banks need to lend the cash
out for a profit but memories
of bad loans are still fresh and
so they aren't lending.



Instead, working capital loans have risen
further. So last month, when the owner
visited his bank for another Rs 10-crore
working capital loan for the Thai order
which would translate to a roughly Rs 30-crore profit,
the bankers refused. With the Thai economy itself
in doldrums, even the export order could not
be properly trusted. Last week, the promoter
finally informed the Thai company of his
inability to meet the order.

India's corporate backyard is currently
littered with such tales of woe.
"What's worse, you can neither blame
the bankers nor the corporates for
such cul-de-sacs,"
says the executive director
of a nationalised bank.

That there has been a slowdown
in certain sectors of the economy
is well-established. Many corporate
houses—big and small—are finding it
extremely difficult to service their debt.

At the same time, banks are flush with cash.
Deposits have been growing every month.
Over June 1997, deposits increased by
18 per cent in May this year, reaching
a whopping Rs 61,545 crore.

At the same time, bank credit to the
commercial sector is on a decline.
In May, it was only 68.5 per cent of
bank deposits. The 1997-98 bank results
are indeed a cause for worry.
While profits of 29 major banks
have jumped by over 40 per cent,
there isn't much to cheer.
The deposit growth for the banking
industry during 1997-98 was way ahead
of the growth in advances at 15.5 per cent,
according to figures released by the RBI.

Indeed, the pressure on spreads for the
banks—the difference between interest
earned on loans by banks and interest paid
on deposits—has been increasing.

In all cases, spreads declined last fiscal
year or, at best, remained stagnant as banks
competed to attract short-term deposits.
By reducing the interest rates and the
cash reserve ratio, the RBI has put
further pressure on banks.

They had to slash lending rates
following an increase in liquidity,
but could not reduce deposit rates for
fear of losing customers.


Says Rajiv Verma, banking analyst at W.I. Carr:
"The structure of Indian banking is such
that spreads come under pressure when
the rates drop. SBI has been the most
vulnerable in this matter because of
the large proportion of long-term deposits
which it has not been able to re-price,
despite falling lending rates."

It's a strange situation: top-rated companies
can easily borrow from banks, but they have
access to even cheaper alternatives like external
commercial borrowings (ECBs),
private placement and commercial paper,
while small and medium-sized corporates
which need funds most are starved of resources.

These corporates attribute stringent pre-disbursement
conditions set by the financial institutions to be
largely responsible for their inability to get funds
against even those loans that are already sanctioned.


Some banks and institutions also demand promoter's
contribution upto 75 per cent of the project cost.
"If we had that kind of money, we wouldn't
need any loans," says a victim promoter.

The bankers, in turn, blame the history of India's
smaller companies. Explains a consultant to a leading
private bank: "Several companies had overstretched
their capacities expecting a higher rate of economic
growth.

More pertinently, they raised huge
amounts from stockmarkets and banks
to put up large projects.

Many smaller and midsize companies took
the investing public for a ride during the
primary market boom. Promoters are known to
have run away. It would be worse if the
banks did not ensure their commitment."

Today when the bottom has fallen out of
the stockmarket and over 3,000 companies
are trading below or at par, the investing
public is finding it safer to put their money
in banks and earn between 8 and 10 per cent rate
of interest. That's why deposits are growing so fast.

Banks need to lend this cash out to make
a profit, but memories of all those bad
loans are still fresh. And blue-chip companies
with high credit ratings cannot use all the
funds available with the banks either due to the
recessionary environment or because they are
already cash-rich.

Banks are now trying to find novel modes
of investment for their surplus cash.
For instance, overseas money markets,
where returns from short-term instruments
are at least 150-200 basis points (1.5 to 2 per cent)
higher than those on similar domestic instruments.

But as per RBI guidelines, banks can only deploy
funds to the extent of their nostro limits
(non-resident deposits plus the overseas investment
limits which is 15 per cent of the banks'
net worth or US $10 million, whichever is higher).


Says S. Gopalkrishnan, executive director of Bank of India:
"To take advantage of the integration of money,
forex and gilt markets, we have started an
integrated treasury branch. We are also taking
steps to integrate the bank's dealing room worldwide
to have a global treasury in Mumbai."

The government is not unaware of the problems.
One way it is trying to tackle the situation
is by giving banks far greater freedom.


Says K. Kannan,
chairman-cum-managing director
of Bank of Baroda:

"To cut down on bad debts and for the recovery
of loans, the RBI has decided to offer banks a
broad set of directives within which they can
determine an approach for recovery of overdue
loans best suited for the bank."


The finance ministry has already
clarified that there will be no end-use
restrictions on banks wishing to invest
in bonds floated by companies,
even if they are meant for takeover
of companies. Several mergers and
takeovers may now be initiated by banks
themselves.

For example, several mid-size cement
companies which are unable to pay off
their loans are almost expecting their
banks to find a white knight for them.

"Such need-based merger activities prompted
by Indian banks might yet become a trend,
" says Anand Vasudevan, banking analyst
at UTI Securities.

The SBI has also launched the
"general purpose corporate loan",
a normal banking procedure in developed
markets. It has cleared a Rs 200-crore
seven-year loan to ITC for which the end
use is not specified. The interest charged
on such loans will be higher than normal
term loans. However, analysts fear that
even if this becomes a trend, such loans
will only be given to bluest of the blue chips.

This won't solve the problems of the mid-cap
and smaller corporates. Having realised that
the small-scale sector was the worst hit by
the tightening of bank's credit, the RBI had
set up a one-man high-level committee headed
by S.L. Kapur, former secretary in the industry ministry,
to suggest steps for improving the delivery
system and simplification of procedures for
credit to SSIs. While the committee submitted
its report to the RBI on June 30, it was only
last week that the RBI accepted 35 of its
126 recommendations.

Bank branch managers will now have more
power to grant ad hoc limits, and banks
will now be free to decide their own norms
for assessment of credit requirements.


Loan limits have also been raised—application
forms prescribed for loans up to Rs 2 lakh
can now be used for Rs 10 lakh loans and
those for Rs 50 lakh and more can now be used
to ask a loan up to Rs 2 crore.

The central bank has also asked banks to
delegate powers to branch managers to grant
ad hoc facilities to the extent of 20 per cent
of the limits sanctioned.

The most important part of the
recommendations, however, is RBI's circular
to the banks that the flow of credit to SSIs
will now be assessed by using data on
disbursement rather than outstanding balances.

Banks have, therefore, been advised to shore
up their disbursement targets along with their
outstanding balances.

Will all this be enough?


Some are sceptical. For example,
M.S. Verma, chairman, SBI,
who says banking in India in the next
millennium will be very different
from what we have been used to till now:

"By changing procedures and interest rates,
we might get some incremental advantage.
To change the growth rate, we have to
look at strategic issues rather than
procedural ones."

In other words,
response of a totally different order.

by: DRT-India
bankfinance555@gmail.com

Fitch Rates Series C PTCs to be issued by CLSS XXXVII Trust 2006

Fitch Ratings has assigned an expected rating of
'F1+(ind)(SO)' to Series C Pass Through Certificates
(PTCs), to be issued by an SPV called Corporate
Loan Securitisation Series XXXVII Trust 2006.
The transaction is a securitisation of receivables
from a term loan maturing on 22 September 2010.


The PTCs' expected rating reflects the credit quality
of the underlying obligor, Shriram Transport Finance Co. Ltd.
(STFCL or "the obligor"), the payment structure of the PTCs
and the legal and financial structure of the transaction.

The expected rating addresses the timely payments of
interest and of principal by the final maturity date
of 23 September 2010, in accordance with the transaction documentation.

The SPV purchased the receivables from Kotak Mahindra
Prime Limited (KMPL or "the originator" or "the seller")
in trust for the benefit of the PTC investors.

The SPV proposes to issue Series C PTCs for a
total consideration equivalent to the value of
the discounted cash flows from the loan, which
will be utilised for the repayment of Series
B PTCs issued earlier.

The loan aggregates to INR750m and is extended by
KMPL to STFCL. The rating of the PTCs is directly
linked to the rating of the underlying obligor,
STFCL, for which Fitch maintains a Short-term
rating of 'F1+(ind)'.

The final rating is contingent upon receipt of
final documents conforming to information already received.

A presale report for this transaction will be
available shortly on Fitch's website, www.fitchindia.com.

Note to editors: Fitch's National ratings provide
a relative measure of creditworthiness for rated
entities in countries with relatively low international
sovereign ratings and where there is demand for such
ratings. The best risk within a country is rated 'AAA'
and other credits are rated only relative to this risk.

National ratings are designed for use mainly by local
investors in local markets and are signified by the
addition of an identifier for the country concerned,
such as 'AAA(ind)' for National ratings in India.

Specific letter grades are not therefore
internationally comparable.

Fitch Ratings currently maintains coverage
of approximately 6,000 financial institutions,
including over 3,200 banks and 2,200 insurance
companies. Finance & leasing companies,
broker-dealers, asset managers, managed funds,
and covered bonds make up the remainder of Fitch Ratings’
financial institution coverage universe.

Fitch India has Five rating offices located at Mumbai,
Delhi, Chennai, Kolkata and Bangalore. Fitch is recognised
by Reserve Bank of India, Securities Exchange Board of India
(SEBI) and National Housing Bank.