After Infosys & Wipro, TCS Under Lens for Body Shopping

The Human Angle 45% of TCS' $8-b revenues come from onshore work It's now the turn of India's largest software company to spell out its stand on a tricky point that tax authorities have been raking up. After Infosys and Wipro, the Income tax department has initiated scrutiny on Tata Consultancy Services (TCS) for claiming tax benefits for onshore services, often derogatorily called 'body shopping'. Onshore software services account for close to 45% of TCS' $8 billion revenues.In a scrutiny notice initiated a few days ago, the I-T department has revisited its argument that onshore software services provided by Indian exporters boil down to export of manpower, rather than software, a senior tax official said. Onshore development refers to the practice of IT companies sending their staff to work in overseas markets, including the US and Europe. Often, such services are rendered in the premises of the overseas client. The tax department has argued that since professionals are under the control and supervision of the company abroad, the contract between the local software firm and the foreign client amounts to export of manpower. Simultaneously, tax authorities say that many software companies often book the earnings from such onshore work in their units located in the Software Technology Parks of India (STPI) to avail tax benefits. Responding to an email, a TCS spokesperson said: "As a policy we do not comment on tax related issues." According to a senior tax practitioner, the timing of the notice is important. "While there is no longer tax holiday for STPIs and EOUs (except for units in SEZs) from April 1, 2011, the government continues to be under pressure to generate revenues," said Indraneel Roy Chaudhury, Tax Leader, South India Practice, PwC. Interestingly, under Indian tax rules, "human resource services" can get the benefit of tax holiday. "But on this," he said, "one needs to examine contracts to determine what would fall within this purview." Trading Punches Over IT Taxman claim Onsite services by software companies boil down to manpower export Earnings from onsite services are booked in STPI units to avail tax benefits Expert Take Government under pressure to up revenues No reason why onsite services should not qualify for tax holiday Software cos, they say, have an edge in tussle Cos Have an Edge, Say Experts In a 'scrutiny notice', the department raises specific issues to give the tax payer an opportunity to explain its stand. It can take the department four to five months after that to make a tax demand. So far, only Infosys figures among large software companies to have received a tax demand for . 450 crore. Last month, the I-T department issued a scrutiny notice to Wipro, seeking details of onsite services it provided to clients. Tax experts feel that the software companies may have an edge in the tussle. "The revenue authorities have been contesting tax holiday for body shopping for several companies now on the basis that this results in export of manpower and not export of software. This issue was clarified in 1994 when Circular no. 694 was issued clarifying that the place of writing of software is not relevant. The STPI unit should be entitled to the tax holiday so long as the software is the product of the unit," says Shefali Goradia, partner at the tax advisory firm BMR Advisors. While the Income Tax department notice refers to the assessment year 2008-09, tax officials say that there is a distinct possibility that similar issues may be raised for other years as well. Significantly, onshore services has been coming down as a percentage of revenue for all service providers as more work moves to cost competitive locations such as India, referred to as offshore locations. Besides, business models have also undergone changes, resulting in a third category called "nearshore services", referring to services provided from locations like Eastern Europe and Latin America, coming into use. According to Goradia, the Foreign Trade Policy also allows sub-contracting to other units in Domestic Tariff Area as well as to foreign job workers. "Therefore, in spirit, there is no reason why on-site development of software by employees of Indian companies should not qualify for the tax holiday," she says.

Nifty Cos Set for Robust Q1 Show

ETIG analysis reveals companies in most-tracked index to record 19% profit jump, 26% rise in sales 

Tech majors, banks & Bajaj Auto to lead earnings growth while oilcos may be worst hit

 Bajaj Auto, Axis Bank and miner Sesa Goa will lead the S&P CNX Nifty companies' June quarter earnings rise by a fifth and a 26% surge in sales, validating Reserve Bank of India governor Duvvuri Subbarao's belief that the economy is still humming. 

Profits of companies in the most-tracked index may rise, but their profitability is poised to shrink due to higher raw material prices, wages, and increased funding costs, an analysis by ET Intelligence Group shows. 
Technology companies led by Tata Consultancy Services and HCL Technologies, which are enjoying abundant order flows from the US and Europe, would contribute to growth numbers. Domestic demand will drive earnings at Bajaj Auto and lender HDFC Bank. 
Among the worst hit may be state-run oil companies as they partly subsidise petroleum products consumption, including cooking gas. A fall in cement prices due to slackening construction and price competition in telecom services may result in these companies reporting a fall in profits. 
"Despite the initial perception of a production slowdown, the revised Index of Industrial Production series shows investment and industrial activity held up well throughout FY11," Anubhuti Sahay at Standard Chartered Bank said in a report. "A recent salary survey conducted by a private firm showed that Indian corporates are still willing to hire and have increased salaries in order to retain workers. While the impact of higher interest rates is apparent in some sectors—auto sales growth slowed to 18% in May from an average of 32% in the previous 20 months—it is not yet broad-based." 
The aggregate net profit of Nifty 50 companies may grow 19% year on year, the ETIG analysis shows. Net sales may advance 26% in the June quarter from a year earlier. This will be the seventh consecutive quarter of aggregate double-digit growth since September 2009 for India's 50 large and frequently traded companies. 
But soaring costs, in the form of higher interest rates and expensive inputs, could reduce the operating profit growth to 21.4% from a year ago. Pressure on Profitability 
This will be the slowest pace of operating profit growth since the September 2009 quarter when profit rose just over 4%, as demand fell post-Lehman bust. Operating margin is likely to shrink by 80 basis points from the year ago, and 170 basis points sequentially to 21.8%. A basis point is 0.01 percentage point. Pressure on profitability may sustain as there are no signs of easing of interest costs and the fall in commodity prices appears more temporary than permanent. With inflation forecast to rise after the recent raise in diesel prices, chances of interest rates falling are slim. 
"We raise our WPI inflation forecast for FY12 to 8.6% from 8.1% as a result of the government's move (to increase prices of petroleum products)," says the latest report by Goldman Sachs Group. 
Higher inflationary expectations are a double whammy for economic growth. The companies would not only spend more on inputs, but also postpone investments. 
The central bank has raised interest rates 10 times in the last 15 months. Policy rates have increased by 225 basis points in the last 12 months alone. 
The Nifty at current levels trades at around 17 times its earnings in the four quarters to June 2011. Though it may not be expensive compared with its range of 17-23 in the last 10 quarters, investors are cautious. Earnings growth may fall further. 
Some expect another 50 basis points rise in the RBI's guideline rate, which is 7.5% which could squeeze investments further. 
"With the RBI prioritising inflation over growth, we expect a 25-50 basis point hike during the course of 2011. But with the underline consumption dynamics, the need of the hour is a pickup in the investment cycle and productivity enhancements," explores Citi Investment Research and Analysis in its latest report on India's macroeconomic trends.
Public sector oil and gas companies will see a repeat of high under-recovery problems seen in the March 2011 quarter. This will translate to subdued quarterly profit figures for ONGC and Gail. BPCL is likely to post a small profit compared with its huge net loss last June, provided the government's aid arrives in time. The slack in order inflows in the engineering space, especially in the power transmission and distribution segment, is likely to impact margins of some capital goods players. Companies such as Bhel and L&T will report slower profit growth during the June quarter.

Vedanta Rejigs Cairn Deal, to Buy 10% More

Vedanta Resources Plc will buy another 10% in the Indian arm of Cairn Energy Plc as part of a restructuring of the much-delayed deal that will result in a $600 million reduction in the price tag. The rejig, announced late on Monday evening, was necessitated because the Anil Agarwal-led company had agreed that a part of the taxes paid by the 30% shareholder, state-run explorer ONGC, could be deducted from revenues, according to three people with direct knowledge of the matter. The tax, known as royalty, is currently paid entirely by ONGC and the government had insisted that its burden had to be reduced before it approved the deal. 

Both Cairn and Vedanta have resisted this, but eventually had to give in as the government would not budge, the people said. Cairn agreed to remove the non-compete fee of 50 per share to sweeten the deal for Vedanta, as payment of royalty would make the transaction less attractive for it.Vedanta has decided to acquire the additional 10% equity in Cairn India immediately and wait for the government's nod to close the transaction by acquiring another 30%, both companies announced in separate statements. The 10% sale transaction will be completed on or before July 11, raising Vedanta's stake in Cairn India to 28.5%. At this state, Cairn Energy will retain 52.2% in Cairn India. The transaction will close only when Vedanta gets government approval to buy a further 30%, raising its stake to a controlling 58.5%.Compromise over Royalty Needed for Cairn Deal 
The spokesmen of both companies declined to say why they were renegotiating the deal. But people close to both sides say a compromise over the royalty issue was needed to conclude the transaction which was first announced more than 10 months ago. 
"The removal of the non-compete fee will result in a reduction in the effective sale price from $8.66 per Cairn India share to $7.85 per Cairn India share," the Cairn Energy statement said. 
This change in price applies to both the initial sale of 10% and the subsequent sale of 30% stake in Cairn India. Gross proceeds for the sale of a 40% interest in Cairn India will amount to $6.02 billion with net proceeds expected to be approximately $5.4 billion in cash, it said. 
Vedanta Executive Chairman Anil Agarwal said: "Vedanta believes this initial 10% purchase is a further demonstration of its commitment to India. We look forward to the successful completion of the proposed transaction." Cairn Energy Chief Executive Bill Gammell said: "Cairn continues to believe the necessary approvals to complete the Vedanta transaction will be received and is working with the government of India in a positive and constructive manner." 
The $4-billion royalty obligation relates to oil-producing assets in Rajasthan, where Cairn is the operator with 70% stake and ONGC holds the remaining 30%. Under the terms of a 15-yearold contract for the block, ONGC pays Cairn's share of royalty, but the stateowned explorer has cited a clause in the same contract to claim that the cost of royalty can be recovered from the total revenue of the field before profit is calculated. 
Cairn has contested this reading of the contract and had argued that accepting this would reduce valuation of the Cairn-Vedanta deal significantly and potentially derail it. 
Last month, a ministerial panel led by Finance Minister Pranab Mukherjee had said the government could approve the deal only if Cairn and Vedanta accepted the condition on royalty and if Cairn ended arbitration proceedings over payment of cess, another tax. 
Cairn and Vedanta executives had said at the time that these conditions would significantly reduce the deal's valuation and the transaction would collapse. In a letter to the government on April 18, Gammell had said the preconditions would "inevitably cause the proposed transaction to fail". 
Oil Minister Jaipal Reddy has said on several occasions that he 'strongly' supports ONGC's stand on the royalty issue as it was a matter of 'national' interest. 
A person close to Vedanta said "the company is willing to make some adjustments in national interest". 
The government and ONGC officials had said they couldn't support a private deal against the interests of a state-run firm. "The ONGC board had passed a resolution in January that royalty payment in the Rajasthan block is cost recoverable as per the production sharing contract," a senior ONGC official said requesting anonymity. 
Cairn and Vedanta have agreed to certain adjustments to the transaction sale and purchase agreement for the sale of part of Cairn Energy's shareholding in Cairn India, involving the removal of the non-compete arrangements and associated fee, which are expected to result in a 5.3% reduction in post-tax proceeds, Cairn said in its statement. 
Cairn and Vedanta have also agreed that completion of the transaction will take place in two tranches: an initial sale of a 10% stake in Cairn India, and a subsequent sale of a 30% stake which remains subject to receipt of necessary consents and approvals from the government.

Can Airtel Africa Take the Weight off Airtel India?

A year after Airtel said hello to Africa, Sunil Mittal's blue-chip company has lost some of its magic in India. That makes Airtel Africa even more critical. Here's a close look at how Airtel has grappled with the many challenges of Africa, and the strategies that inform its determination to succeed

:: Malini Goyal 

    Last June, both Sunil Mittal and Bharti Airtel were the toast of the town. The $9-billion acquisition of Zain Africa transformed the 53-year-old Mittal into a global entrepreneur. And it made Airtel the fifth largest mobile operator in the world, with a footprint in 19 countries. 
    Exactly a year later, things look drastically different. Airtel's profits have fallen for five quarters in a row, unprecedented for a company that set benchmarks for record growth and profits in the past. It is losing revenue and market share in India. And the latest, as reported by ET on June 25, is that Airtel India is undertaking a major operational restructuring — a move that could affect almost 2,000 jobs. The company responded on Saturday saying the restructuring won't affect many jobs. 
    And the thing for Mittal is that the news from Africa is not cheery either. 
    Airtel's Africa operations have missed most internal targets that it first set out for the first year — from revenues, subscriber base to profitability. Most of its operations are still making losses. Airtel had initially hoped to turn them around in 12-15 months. Outsourcing non-core operations — a practice Airtel pioneered in India — have taken longer than it was expected to in Africa. The company underestimated the cost of turning around Africa operations. 
    And now, to meet the growth targets there, Airtel has had to increase its Africa capex by 50% in 2011-12. "Africa with 16 countries is far more complex than India. One size fits all will not work here. They took a simplistic approach," says Federico Membrillera, managing partner, Delta Partners. 
Call Drops 
That Airtel's India operations are facing headwinds is not news. With growth peaking, especially in meatier markets like cities, average revenues per user (ARPUs) have been falling. It dropped 12% in the fourth quarter of 2010-11. The competitive intensity in the Indian market has risen with as many as nine operators in each telecom circle fighting for customers on the back of tariff cuts. Airtel India's big bet on next-generation 3G services, for which it took 13,400 crore debt for buying spectrum, is yet to pay off significantly. 
    The bad news from Africa — both on costs and timelines — has come as a bigger surprise. Africa-based experts point to three things. One, the company underestimated the level of complexity and set unrealistically aggressive targets. Two, Zain had made little investment in infrastructure in the African operations. So, Airtel had to invest more than it had budgeted. Three, Airtel is great at centralisation and squeezing inefficiencies out, something that they have done well in India. But Africa, with 16 different countries, different rules and regulators, markets, languages and culture, is difficult to centralise like India. 
    Analysts in India partly blame Africa for dragging down the company's financial performance. A few weeks ago, credit ratings agency Fitch reduced Bharti Airtel's outlook to 'negative' from 'stable' citing risks involved in its African operations. Faced with high-cost debt, Airtel has had to pre-pay about $900 million of its debt. Its recent plan to raise funds via a global bond issue has seen little progress. 
Many Countries, Many Problems 
Africa's challenges make for a sobering read for all who had bet on Airtel replicating its India model there. "The vendor ecosystem in Africa is poor. We have had to build it almost from scratch," says Inder Walia, director (HR), Bharti Group. Airtel has had to take all its vendor partners like IBM, Spanco, Mahindra Tech from India who are building their operations, entailing more time and costs. 
    The company is now trying to replicate its India strategy of sharing infrastructure with its competitors in Africa. Airtel has sent invites to telcos — like Etisalat, Vodacom, Millicom and Orange — to set up a pan-African tower company. So far the response has been lacklustre. Experts say such collaboration is logistically difficult in Africa because the footprint of telcos often does not overlap across so many countries. Barring MTN, which has almost similar footprint like Zain, there aren't comparable multi-country operators. 
    Perhaps, the most complex and niggling problems come from the fragmented African market, with many governments and many rules as well as a different African work culture. 
    For example, Airtel is facing constraints in importing telecom equipment into some countries that have a forex neutrality clause in place, which ensures that the value of goods it imports cannot be more than its exports from the country. 
    Duty exemptions don't come easy. In Kenya, duty exemptions took almost three months to process. Most of the 16 countries where Airtel operates have not signed double taxation avoidance treaties. This has cost and logistical implications. If one of Airtel's Kenya-based vendors were to set up central billing for all the 16 operations, Airtel will lose lot of money in taxes. 
    Given the landlocked nature of most African countries, equipment often have to be transported by roads leading to cost and time overruns. "Often we cannot correctly estimate the timeline," says Durga Kota, MD, Bharti Integrated Account, IBM, Airtel's partner. 
    Dealing with local regulators in the protected economies of Africa has also not been easy. In Kenya, where Airtel dropped tariffs, the government intervened as its competitors lobbied hard. "They need to devote more time, effort and capital lobbying with the government," says Membrillera. 
    The African work culture is also something that Airtel is coming to terms with. African employees typically start their day at 8 am and close at 4.30 pm. Driving back after 6:30 pm is not the safest thing to do. Moreover, Africa's relatively laidback work culture in the continent has meant that Airtel's deadline-driven work culture from India cannot be easily transplanted. 
    "The fact that they [Airtel] have been slow does not surprise me," says Guy Zibi, MD of AfricaNext Investment Research. But he adds, "If there is one company that can deal with the odds in Africa, it is Airtel," he adds. 
Bharti Gets On With It 
The basis for such optimism is Airtel's very visible determination to change ways business is done in Africa. Despite delays, Airtel has outsourced key operations — telecom network, IT and call centres — to IBM, Ericsson, Nokia, Siemens, Spanco, Mahindra Tech and others. About 3,000 of ex-Zain Africa staff has been moved to the rolls of new partners. 
    Distribution and marketing networks are being overhauled. Over 100 people in the African operations were trained in six weeks for this. There were issues with dealers and retailers in Africa. Unlike India, the distribution in Africa is led by a few wholesalers whose discounting game had pushed many retailers into losses. In May, after detailed discussions, Airtel launched a new channel partner programme. "We have already begun to see better [30-50%] pick up of stocks," says Rajan Swaroop, managing director, Airtel Nigeria. 
    Airtel's customer initiatives are doing well, says a May 2011 Goldman Sachs report. It has rationalised tariff rates in almost all its markets in Africa. This sustained tariff differential has led to shift in minute usage to Bharti in multiple-SIM markets like Nigeria and Ghana. It has also launched customised packages in different markets, taking into account the traffic patterns and network quality. 
    Congested network and call drops have been a recurring problem in Africa. Bharti's strategy to first scale up network capacity and then grow subscribers through tariff cuts has helped offer better service, says the report. 
    Congestion in Airtel's Africa call centres has dropped from 90% to 20-30%. Africans frequently lose their handsets to theft and the issuing of a new SIM card typically takes 7-14 days. Airtel's SIM swap scheme means a new SIM can be issued in an hour. E-recharge, which helped save 3-4% of operational expenditure in India, was introduced in Nigeria in December. By the end of 2011, Airtel hopes e-recharge will cover 80% of the African markets. 
When in Africa… 
Zain was a revolving door of sorts — five brand changes since 2001, frequent board level changes and almost zero investment in infrastructure, HQ in another continent and little co-ordination between the 16 countries in Africa. "It was like each MD led a semi-retired life doing his own thing," recalls a senior Africa-based consultant who has interacted with some senior Zain executives. 
    Airtel changed all that. It moved its Africa headquarters to Nairobi (Kenya) from Bahrain. "With all key stakeholders in Nairobi, decisions have become faster. Things are easy to explain," says Tiemoco Coulibaly, CEO (Francophone), Airtel Africa. Recently, Coulibaly wanted to set up a cell site in a remote area on the border of Chad and Sudan. The decision was taken in a day. The area was covered in three months. Airtel has committed $1.5 billion in network rollout in the next 18 months. "All this was almost impossible earlier. Bharti's DNA is speed, speed, speed," he says. 
    As a result, senior level attrition — a good indicator of problems in any big M&A deal — has been negligible. This is despite the fact that the centralisation thrust and outsourcing of functions like networks, IT, customer care have clipped powers of country MDs significantly. 
    Airtel has also created a new zonal structure that empowers the second rung leaders in Africa. It has created positions for 40 new zonal managers who are like zone CEOs with profit and loss responsibilities. "This delegation of power has energised the system — subscriber addition has moved up well," says Jayant Khosla, CEO, Airtel Africa (Anglophone). An elaborate employee exchange programme has been launched. 
Topline, Bottom Line 
Airtel's expansion in Africa has also been good for Africans. In Africa, ARPUs are very high — because call rates are high. But that keeps minute usage very low. In India, call rates are about a cent a minute (about 40-45 paise) as compared to 6-12 cents in Africa. 
    While some players like MTN and Vodacom are making money in Africa, at least a third of African operators today do not make money. Somebody has to figure out a better viable model to bring down costs, lower tariffs and grow subscribers while maintaining profitability in Africa. 
    Airtel is showing the way. With its outsourcing model and its projected revenue growth, some experts reckon Airtel could bring down the operating costs in Africa by as much as 70%. "Airtel will have profound impact on the business models in telecom industry in Africa," Zibi says. 
    For many years, the Kenyan government has been talking about building a BPO business. Nothing happened. The largest BPO there had 400 people. Spanco, an Airtel vendor, has employed 1,000-plus people within a year. IBM has assembled a top-notch global team to manage Airtel's business and is now figuring out ways to build talent supply through training and tapping the African diaspora. 
    At the Airtel headquarters in Delhi though, it is the bottom line and topline issue that must be consuming the top management. Manoj Kohli, CEO, Bharti Airtel International, is confident about Airtel's prospects in the continent. "We are well on course to touch 100 million customers, $5 billion revenue, $2 billion Ebitda [at 40%] by 2013 [from 45 million subscriber and 26% Ebitda today]," he says. Revenues and customers yes but most experts — from Fitch to Goldman Sachs — consider profitability or Ebitda margins of 40% by 2013 to be ambitious. 
    Airtel Africa needs to succeed even more now than when it started — because Airtel India now needs that success much more than ever before.

Costlier diesel set to fuel 10% increase in nat’l freight rates

Fearing Price Hike, Pranab Asks States To Slash Levies

New Delhi: Only hours after the government raised diesel prices by Rs 3 a litre, freight rates seemed headed for an 8-10% increase and some trucker associations warned of strikes, prompting finance minister Pranab Mukherjee to urge states to cut cess on fuel to cushion the impact. 

    Transport associations demanded an immediate rollback as did political parties and Opposition chief ministers. Congress allies the Trinamool Congress and the Nationalist Congress Party joined the protests, saying the decision was a blow to the aam admi. 
    As a sharp rise in freight rates seemed imminent, some experts said the actual weighted impact should not be more than 4% and that truckers were being opportunistic. 
    Already, reports said, freight rates have risen by Rs 2,000 per 10 tonne. For major metros like Delhi to Mumbai, Chennai and Kolkata and, prices moved up by Rs 2,000 to Rs 23,000 , Rs 51,000 and Rs 26,000, respectively. 
    According to reports, the Delhi transporters association on Saturday threatened to go on strike if the government did not reverse the hike. But this does not seem likely, with oil minister Jaipal Reddy insistent that the high cost of crude rules out soft options. The increase should not be more than 4%, whereas truck unions are gearing up for more than 10% hike, he said. 
INDIA SEES RED 
Price hike rollback chorus grows with opposition leaders & CMs of rival-ruled states lending voice to transport lobbies 
Congress asks states run by it to cut levies to ease the blow for aam admi; Maharashtra government mum, Mantralaya officials say no discussion yet on pruning taxes 
BJP describes the Congress as 'insensitive to the sufferings of the common man' as its activists protest across cities 
The CPM and other Left parties have asked workers to hold rallies to highlight 'another cruel blow' by the Manmohan Singh govt 
NCP TO JOIN PROTESTS 
    The Nationalist Congress Party (NCP), an alliance partner in the state and at Centre, will launch an agitation against the hike in the prices of diesel, kerosene and cooking gas. Maharashtra deputy chief minister Ajit Pawar on Saturday told party workers to protest the hike. "We are part of the government, but we are against this hike. I want NCP workers to react to the hike." P 2 Experts fear arbitrary rate hike 
New Delhi: A day after the government announced a hike in fuel prices, North India Motor Road Transport Association president Charan Singh Lohara said: "Freight rates will go up by 8-9% for all routes from Saturday because of the increase in diesel rates." The impact is sure to be felt on prices of perishables like vegetables as well as industrial items. But S P Singh of the Indian Foundation of Transport Research and Training warned that truckers and service providers such as couriers might be planning unjustified hikes. "Based on market feedback, we apprehend an arbitrary increase in truck rentals and retail parcel rates as in the past. The government should check this," he said. 
    Besides diesel, the Rs 50 rise per domestic LPG cylinder is sure to pinch household budgets, besides restaurants, and this decision might also be under pressure for review as it hits a very wide swathe of the population. The All India Motor Transport Congress demanded a rollback in diesel prices. "We request the PM and the finance minister for a I00% rollback of the diesel price hike," it said. 
    Mukherjee's move to ask states to reduce levies is aimed at transferring some of the onus of containing fuel price rise from the Centre to regional governments. 
    The Left and BJP hit the streets in protest and staged demonstrations in many parts of the country. 
    The Left parties asked all their units to immediately conduct hartals, demonstrations and other protest actions.BJP spokesman Shahnawaz Khan said, "It would not be an exaggeration if we say it is like imposing economic emergency on the nation." He further questioned "if it is Manmohan Singh's government or Manmohan Singh's company". 
Parties, unions want rollback of fuel hike 
New Delhi: A steep hike in fuel prices sparked protests across the country on Saturday with political parties and trade unions demanding a rollback and warning of agitations. The Centre on Friday increased diesel price by Rs 3 per litre, domestic LPG by Rs 50 per cylinder and kerosene by Rs 2 per litre. 
    Tamil Nadu CM J Jayalalithaa said: "The hike in diesel price would result in increased freight charges. This will lead to an increase in prices of all essential commodities, besides the price of vegetables." "Housewives, farmers and poorest of the poor will be badly affected," said leader of Opposition in Lok Sabha, Sushma Swaraj. TNN

A protest rally taken out by the BJP in Mumbai

RIL’s Andhra costs rose $3 bn in 2 yrs: CAG draft

New Delhi: Reliance Industries Ltd's investment plan for bringing its Andhra offshore D1 and D3 gas fields to production increased by almost $3 billion (Rs 13,500 crore), a comparison between the cost of 13 elements of its initial and revised estimates shows.

The Comptroller and Auditor General's draft report states that RIL's estimates increased from $2.39 billion to $5.19 billion. The comparison, carried as 'Annexure 4.3' in the report, a copy of which is available with TOI, points to "abnormal upward" revisions "without providing basis of such estimations". Higher capex reduces government's returns from a field since companies are allowed to recover their costs before calculating profit. The CAG report – first reported by TOI on June 13 – merely said the auditor is "unable to quantify" the government's loss which could be "huge". Did tender delay lead to cost hike? New Delhi: Although the annexure clearly puts a figure to RIL's capex estimate, the CAG draft report itself—first reported by TOI on June 13—merely said the auditor is "unable to quantify" the government's loss which could be "huge". Reliance did not respond to queries from TOI. Senior company executives, while maintaining they hadn't received the CAG report from the oil ministry, said the substantial rise in global rates for hiring drilling rigs, oilfield services and installations besides ships and helicopters contributed to the higher capex. "The daily rate for a rig shot up to $500,000-550,000 around 2006 from $110,000-120,000 in 2004. Similarly, services cost of $125,000 per day in 2004 and rose to $150,000. With such a cost escalation, which is beyond RIL's control, obviously price of drilling a well would go up," an executive familiar with the fields planning said on condition of anonymity. He said the company had one development concept in 2003, just a year after the "frontier discovery". But with subsequent inputs—data and domain knowledge from international experts —a new design concept was required in tune with the higher potential. "This too may have contributed to the higher cost… CA or any auditor should have an understanding of the intrinsic characteristics of an industry before taking a critical view in isolation. There has been no wrong doing (in Andhra offshore field). Once we have a copy from the government, we will put all doubts to rest." But the annexure points out delays in Reliance's tendering process and execution of contracts for engineering, design etc—activities that were under the company's direct control and may have contributed to the cost escalation. Some of the major elements that saw substantial increase in costs are, development wells (from $944 million in initial plan to $1.16 billion in revised plan), production facilities ($1.34 billion-$2 billion), subsea control systems ($358 million-$722 million), deepwater pipeline ($142 million-$323 million), onshore terminal and site grading ($192 million-$550 million), control-cum-riser platform ($0-$446 million). On development wells, CAG observed, "There was reduction in the number of wells from 34 to 22 in the revised FDP (field development plan) but cost per well was increased from $27.78 million to $52.94 million. Further, 18 wells were actually drilled till June 2009 with average cost per well of $56.8 million, i.e. actual cost more than double from FDP cost levels."

Local fund houses seek Sebi approval to launch international feeder funds

Slowdown-hit Funds Plan Return Trip Overseas

Indian fund houses are trying to cash in on the opportunity for international funds amid waning returns from local markets. Encouraged by the robust returns, many fund houses are increasingly investing beyond the boundaries to tide over the local downtrend.

Leading fund houses, including DSP Blackrock, JP Morgan Mutual Fund, Deutsche Mutual Fund, and Franklin Templeton, have sought approval from the capital market regulator Sebi to launch international feeder funds. JP Morgan Asean equity offshore fund is currently raising money from the market. An international fund is a fund that can invest in companies located anywhere outside its investors' country of residence. A feeder fund is one that invests through another fund called the master fund. "It'll be naive on the part of investors to think that Indian assets will fulfill their overall return requirements. There are several good opportunities worldwide. International exposure will help investors diversify their investment portfolios regionally," said Pankaj Sharma, head-products and risk team, DSP Blackrock MF. Investors should remain invested for at least 18-24 months to benefit from these funds, he said. In the past one year, international funds were one of the best performing fund categories in India with average returns of 13-15%. Some of the fund houses that have sought regulatory clearance include JP Morgan with its America Large-cap Equity Fund, Franklin Templeton's US Opportunities Fund, Deutsche that plans to launch an offshore gold and precious metals fund and DSP Blackrock for its five feeder schemes around themes such as global allocation, global dynamic equity, Chinese equities, Latin American equities, and world agriculture. "We're a product company and our endeavor is to provide investors several investment options," said Mr Sharma. Indian indices are lagging their Asian peers due to deteriorating macroeconomic fundamentals such as high inflation that is posing a threat to growth. Also, rising global commodity prices, including copper, crude oil, and rubber, weighed on Indian shares while it proved beneficial for international funds. Markets in Brazil, China, Russia, Peru, South Africa, Nigeria, and Mexico performed better than Indian equities in the past one year helped by rising prices of commodities such as crude oil, coal, copper, aluminium, silver, and iron ore. In a good market year like 2009, Indian shares with 103% returns underperformed Brazilian stocks that gained 127%. Also, economic recovery in developed markets such as the US is prompting several fund houses to tap their potential for returns. Franklin Templeton and JP Morgan are planning to launch funds that will invest in the US markets. "Franklin US Opportunities Fund will help Indian investorsbenefit from the economic recovery in the US. Investors will also benefit from global operations of American companies," said Harshendu Bindal, president, Franklin Templeton Investments. "We expect demand for global products to increase as returns from Indian markets will normalise in the coming years. Historical experience suggests that the top performing markets change from year to year. Investors should diversify their investment portfolios. Such a strategy will eliminate chance of missing good opportunities," Mr Bindal said. International funds such as DSPBR World Energy Fund, DWS Global Agribusiness Fund, DSPBR World Mining Fund, and Fidelity Global Real Assets Fund gave average returns of about 20% in the past one year. "While it will be difficult for fund marketers to collect large sums of money from one market, they are launching feeder funds in different markets and pool in money and then strengthen asset base of the main fund," said the channel head of a bank-promoted fund house.

Cidco flat transfers to be legalized

Mumbai: The state government plans to regularize the illegal transfer of flats allotted in Cidco projects in Navi Mumbai and other areas. It was decided, at a meeting at the Mantralaya on Tuesday, to initiate an 'amnesty scheme' to legalize such transfers. 

    People allotted house in Cidco projects cannot sell such flats for at least five years. But, many beneficiaries have bent this rule by issuing the power of attorney in the favour of another person. Norms advocate action in such cases. CIDCO authorities reportedly said an amnesty scheme for a period will be launched from July 1. Some state government officials said it would set a precedent.

Inflation Rises to 9.06%, Rate Hike Inevitable

India's inflation rose to a higherthan-expected 9.06% in May, highlighting the limits of successive rate increases in taming price rise and raising the spectre the central bank's monetary tightening cycle could now run longer than previously thought. The Reserve Bank of India (RBI) is to review its monetary policy on Thursday, and the latest wholesale price inflation data have all but cemented the possibility of a 25-basispoint increase in policy rates.

A rate increase is a rare event during a mid-quarter review of the monetary policy, and one so soon after last month's shock 50-basis-point increase will underscore the difficulties facing policymakers in battling the inflation monster. The central bank, which has raised rates nine times in the last 15 months, gave a peek into its thinking when it warned of an 'upward pressure' on inflation in a report on Tuesday. Former RBI governor C Rangarajan, who now heads the Prime Minister's Economic Advisory Council, said he expected the apex bank to look at the inflation issue more seriously now. Ahead of Tuesday's data release, the market had expected the headline inflation to edge up to 8.7% in May from 8.66% in April. An ET poll of 13 financial institutions showed that all but one expected a 25-basis-point increase in repo and reverse repo rates—the rates at which the RBI lends to banks and receives from banks for keeping their surplus funds. A basis point is one-hundredth of a percentage point. The successive rate increases have helped in slowing the economy—GDP growth slipped to a five-quarter low of 7.8% during the January-March quarter—and possibly even inflation, which has eased from a peak of 11.1% in April last year, but not enough to bring it to the targeted range of 4-5%.Core Inflation up to 7.2% "The tone of the policy is likely to stay ultra-hawkish," Barclays Capital analysts Siddhartha Sanyal and Kumar Rachapudi said. An imminent revision in fuel prices and higher support prices for food crops will keep the inflation threat at an elevated level, and economists said the RBI will be worried more by signs that manufacturers continue to enjoy pricing power, implying strong demand conditions that could lift prices further. Core inflation, or price rise in non-food manufactured products, rose by nearly one percentage point to 7.2% in May from 6.3% in April. Food inflation moderated to 8.4% from 8.7% in April while in the case of fuels, inflation dropped to 12.3% in May from 13.3% in the month before. "The rise in core inflation will be interpreted by RBI as a sign of rising pricing power, and therefore, cements the case for a rate hike," said Sonal Varma, India economist, Nomura. In China, the country's central bank announced a 50 basis point increase in banks' reserve requirements on Tuesday after inflation there rose to a 34-month high of 5.5% in May. Economists warned against exercising the so-called "nuclear option" of a 50-basis-point increase in rates. Citi's Rohini Malkani cautioned against a sharp action, reasoning that 60% of the inflation was driven by commodities and was, therefore, beyond the RBI's control. The need of the hour was a pick-up in the investment cycle and productivity enhancements, particularly in food processing and warehousing. Rangarajan said the burden of price management should not fall entirely on monetary policy, and there was a need to use both monetary and fiscal policy to control inflation. Added Keki Mistry, vice-chairman & CEO, HDFC: "To my mind, it's more of a supply-side issue and hopefully with the monsoon we are seeing now, food prices should come off, especially with the base effect kicking in." "The upward revision of 0.66%—the smallest of revisions in the last four months — is a positive indicator of inflation momentum coming off," said Shubhada Rao, chief economist at Yes Bank.

Tatas, Loop & Aircel-Maxis Under Probe, CBI Tells JPC

Agency may file third chargesheet early next month on the basis of response from Mauritian authorities

The head of the Central Bureau of Investigation, or CBI, has told the Joint Parliamentary Committee (JPC) that it is investigating two transactions related to the Tata Group, the ownership of Loop Telecom, and the controversial Aircel-Maxis deal.

CBI Director AP Singh, who made a 45-page presentation to the JPC, said the agency had failed to unearth anything incriminating against Niira Radia, corporate lobbyist and head of a corporate communication firm, whose leaked conversations with assorted bigwigs have riveted the nation. The two transactions involving the Tatas are an advance of 1,700 crore given by Tata Group company Tata Realty and Infrastructure Ltd (TRIL) to Delhi-based realty major Unitech, and a real estate transaction in Chennai involving another group company, Voltas. The CBI said board members of Tata Sons, the group's holding company, were privy to the decision to advance money to Unitech. It also said Unitech utilised these funds to pay for the mobile permits it got in 2008, a member of the JPC told ET on condition of anonymity. The Tatas and Unitech have vehemently denied there was anything untoward in the entire transaction. Singh, who was accompanied by a number of officials, said the agency was also awaiting response from the attorney-general of Mauritius to queries seeking information about the source of funding and ownership of Loop Telecom, which is alleged to be linked to the Essar Group, and Delphi Investments. The latter is the entity to which Reliance Telecom—part of the Anil Ambani group—had sold its stake in Swan Telecom, alleged to be a major beneficiary of the so-called 2G scam. The response from the Mauritius authorities could form the basis of a chargesheet the CBI could file in early July. The deposition of the CBI director was described to ET by people familiar with it. They declined to be identified because the JPC's proceedings are confidential. In the case of Loop, the CBI is probing whether it was a front for the Ruias of Essar. It is widely believed that Loop and Essar would be named in the third chargesheet. Both Loop and Essar have strongly denied these allegations. The agency has so far filed two chargesheets. It has arrested former telecom minister A Raja, and the owners of Swan Telecom (now known as Etisalat DB) and Unitech Wireless. These businessmen have been accused of conspiring withRaja to grab airwaves and licences at below market prices in early 2008. The CBI, under the instruction of the Supreme Court, is also investigating the period between 2001 and 2007. JPC to Summon Telecom Bosses Kanimozhi, daughter of DMK leader M Karunanidhi, has also been jailed because of a . 200-crore payment by DB Realty, the promoter of Swan Telecom, to a television channel in which she is a shareholder. In consonance with the understanding reached among the members before the meeting, the CBI director was asked only a few questions, mostly on minor issues. It was decided that he would be allowed to make his presentation on Tuesday, leaving his cross-examination for some other day. The CBI had been called by the JPC to brief the parliamentary panel on the investigations. The agency has submitted to the JPC copies of both the chargesheets filed so far, as well as the 80,000 crore supplementary documents. CBI officials will be called again as witnesses by the JPC later for questioning. The Congress members of the JPC are believed to have stressed the need to probe the National Telecom Policy of 1999 (NTP 99) and sought to know whether it was backed by the recommendations of Trai. NTP 99 was formulated by the BJP-led NDA government. JPC chief PC Chacko also told newspersons after the meeting that the panel had shortlisted 85 names who would be summoned as witnesses. These include former telecom ministers, ministry officials, Attorney-General Ghulam Vahanvati, former attorney-general Soli Sorabjee, and former chairmen of Trai and BSNL. The bosses of telecom companies, including the likes of Ratan Tata and Anil Ambani, are also likely to be called. Asked by newspersons, Chacko said the list could include Raja, who is now in Tihar jail, after "following proper procedures".