Global funds get cold feet in participating in India’s disinvestment

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Green is making the government’s ambitious plans to sell its family silver see red! Global Funds, under pressure from its investors, want companies to adhere to green standards.

The move by the government to sell a small part of the blue chip companies like Coal India, National Mineral Development Corporation (NMDC) and Manganese Ore India Limited (MOIL) could run into rough weather. Global funds which were apparently sounded out ahead of the disinvestment plans by investment bankers have said to have poured cold water over the government’s plans.

The government was looking to sell 10 per cent stake each in the three companies during the current financial year. If the government plan were to succeed, disinvestment in the three companies could have fetched it a little under Rs. 25,000 crore or a little under US$ 3.73 billion. The government has set itself a target of Rs. 56,500 crore or nearly US$8.4 billion from disinvestment in the current year.

Some leading funds are believed to have indicated that environment related issues could force them to abstain from the disinvestment process. Several sovereign funds and private equity investors are facing the heat from green groups to abstain from investing in companies which, in their opinion, are not environmentally friendly.

There are already examples of some influential funds having excluded Coal India and National Thermal Power Corporation (NTPC), from their investment radar. Norway’s Government Pension Fund Global (GPFG) decided to abstain from investing in 52 power companies around the world where the main source of energy was coal.

While the disinvestment target of the government could take a hit because of this, the listed companies could also be hit at the bourses because of the lack of funding: in effect, it could be a double whammy for them.

  

Several global pressure groups, citing the need for sustainable environment, are putting pressure on large funds to avoid investing in companies that are not careful about the environment.

Demand for job reservations reverberating across several parts of India

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Jobs! Suddenly, everyone seems to want one.

With the economy not generating enough jobs despite the GDP growing at a healthy clip of at over 7 per cent annually, trouble is brewing across several states with communities demanding reservation for government jobs. The demand for job reservations is a powerful magnet for leaders who want to make their political presence felt.

Last week, an agitation against a rape case in Maharashtra caught the fancy of the Marathas, lakhs of who marched in silent protests demanding justice. The teeming masses also wanted reservation for Marathas in government jobs, claiming that the welfare of the community has been overlooked.

The Jat community in Haryana, which has been demanding reservation for jobs, is again girding its loins. Its community members have been holding rallies in different locations in Rajasthan, Haryana, Punjab and Uttar Pradesh. The significance of holding rallies in Punjab and Uttar Pradesh cannot be underestimated since assembly elections are due in both the states next year.

Gujarat’s saw leader Hardik Patel being catapulted to the national limelight when he led the agitation for the wealthy Patidar community. The Patidars like to believe that their rally was one of the reasons why former Chief Minister Anandiben Patel had to step down. The demand for job reservations has not died down despite the political upheaval that was caused.

In Andhra Pradesh, the demand for job reservation for the Kapu community is gathering some steam too.  Chief Minister Chandrababu Naidu has to handle a situation where Kapu community leader Mudragada Padmanabham went ahead with his third hunger strike in six months. 

The issue of reservation that is cropping up across the country needs to be seen in the light of issues of lack of livelihood. The situation is becoming such where the chasm between the haves and the have-nots has been growing and suddenly the violent protests have new meaning.  In the land of plenty, where opportunities are many, such protests will have no chance to grow.  But with economic growth not leading to employment, issues are bound to creep up.

The Government will do well to look at the issues of the masses and create ample job opportunities so that the country does not go up in flames. While I am not for “reservation” per se, but this disquiet has more to do with a perceived lack of prospects. Villages are getting urbanized and not many are interested in tilling the land anymore, which is seen as a futile endeavour by the educated "connected' youth.

The issue seems to be one of communication and lack of faith in the Government initiatives. The report card of the Government, which is doing an amazing job of policy level changes to propel growth, should not be bogged down by these protests and be seen as doing nothing to address these issues.  Schemes like the SEZ which have been reversed/shelved, which had the potential to revolutionize the job prospects by having mandatory processing areas, need to be relooked at.

The reservations notwithstanding, the faith building measures such as initiating dialogues with the communities, getting industry interested in creating job/employment opportunities, incentivizing private participation in infrastructure and therefore livelihood generation, skilling the masses and offering benefits and entrepreneurial mentoring and options will go a long way in nipping the issues in the bud and send out signals of a proactive government, going that extra mile to showcase its commitment to the people. 

Crude oil prices should get everyone’s eyeballs now...

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Indian government’s elbow room may get reduced dramatically if prices keep inching up

Global crude oil prices have already breeched the $45 per barrel figure in September 2016. Not a healthy sign considering that in January, it had hit the rock bottom of $28 a barrel and the highest of $50 in June. As winters approach demand for crude oil increases, adding to a global upswing in prices.

Crude oil prices have the potential to make or break the global economy. In July 2008, crude oil touched its lifetime high of $147.27 sending the global economy, already in a downward spiral, into a tailspin. It fell to under $50 per barrel in January 2015 for the first time since May 2009, providing relief to many oil consuming nations.

OPEC and Russia, the largest oil producers(28% of 88 Mn barrels of crude) are holding talks to ensure that it is a win-win situation for the oil producing nations. This includes trying to reach a bilateral oil and gas cooperation formula. Some OPEC countries have supported the cooperation pledge by the two countries, suggesting the crude oil under $50 per barrel was “unacceptable”.

Countries like Russia, Saudi Arabia and Venezuela are heavily dependent on earnings from crude oil to sustain their economies. Russia is estimated to lose $2 billion with every dollar fall in crude oil prices while.

Unfortunately, that spells as very bad news for the rest of the world, including India, where 80% of our domestic requirements are met by imports!

Crude oil inching towards the $50 per barrel mark could be a worrying sign for India.

During the last 10 years, India has imported inflation because of high global crude oil prices. Over the years, this has been one of the weakest links for India’s fiscal management.

Over the last 12-18 months, the government has raised customs and excise duties which showed up in its tax collections. During 2014-15, the government earned Rs. 75,441 crore compared to Rs. 46,926 crore a year ago. In addition to this, state governments earn revenue by levying sales tax. The ability of governments will be severely curtailed if crude oil prices were to continue the upward spiral. But, during this time when the prices were sliding, it did not mean that consumers in India paid less.

During 2015-16, as a result of low crude oil prices India’s oil import bill has nearly halved to around $70 billion, giving the government elbow room for spending on growth on schemes like ‘Housing for All’, which could be a game changer for India’s urbanisation plan. Prices of inputs like steel, cement, machinery and other could see an increase with higher oil prices.

I hope that the Government has factored in the price rise of crude imports in the budget, otherwise, with rising inflation, the spectre of a huge fiscal deficit also looms large, spelling trouble for Indian economy!

REITS ARE READY TO TAKE OFF?

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 There has been much excitement about the future of real estate investment trusts (REITs) in India on the back of two interesting developments recently. 


The first was a regulatory change where SEBI allowed REITs to invest up to 20 per cent of their corpus in projects which are under construction. The second was the policy change which now allows REIT investment into educational institutions.

For the realty industry which has been cash strapped for some time now, this is great news. Several companies could use this route to unlock the value in their educational ventures and that is why policymakers should be closely watching the developments.

India is now waking up to REITs, which is an established mode of investment for institutional as well as retail investors for the real estate sector.

REITs have emerged as a tax efficient way to unlock value for real estate companies. Developers invest huge sums in acquiring land, stay invested to build the property as a commercial, healthcare or educational venture which gives a healthy annual return. With REIT funds for educational projects now a reality, realtors have one more option to unlock value for the assets that they own.

REIT is an investment vehicle that parks money in realty projects that have been completed, hence earning rent for the investors. Since it has annuity income, it is referred to as one of the policy measures that can, potentially, transform the Indian real estate sector. At a time when realty returns are negligible, REITs for educational institutions can be a boon for the industry.

SEBI’s regulation has, after careful consideration, decided to keep REITs confined to high net worth individuals. Its conditions impose enough checks and balances on the functioning of REIT to ensure there is transparency in their operation and that the interests of the investors are protected. SEBI’s regulation, debated and discussed at length as it evolved from the beginning of the decade, seem to be a little out of sync with reality.

The recent decision to remove dividend distribution tax and allowing REITs to invest 20 per cent of its investments in projects under construction are welcome. It confirms that the policymakers are in the right direction to make sure REITs can take off. A more aggressive nudge by the policymakers and regulator would help realty companies out of the tight liquidity they find themselves in.

If implemented in the right earnest, these changes have the potential to unlock value for shareholders and assets that these companies are saddled with. Since India’s market regulator does not allow retail investors to invest in REITs, it will not be possible for them to be part of the wealth creation under the REIT model.

But global experience shows that several REITs are also listed at select exchanges, which gives an opportunity to study their performance based to returns given to the markets. Five year returns between 12-24 per cent for REIT funds have been seen in different markets. Japanese and Malaysian markets have been found to have returned 7-12 per cent returns.

For the Indian markets, REITs will be governed by guidelines of the market regulator, Securities & Exchange Board of India (SEBI). It will have to comply with the need for an independent trustee, auditor and others.

Several global funds are looking for better returns and have been eyeing emerging economies to park their funds. India’s strong growth, led by domestic consumption, could be just the right opportunity for these funds. For realty companies, it would mean institutional investors buying a part or entire stake into their projects for annualised returns. That liquidity and unlocking of value could be critical for fuelling further growth for the realty companies.

Creating the win-win situation that could marry the needs of policymakers looking to drive growth further, investors seeking better returns and realty companies who could unlock value hidden in their assets could just be music for India’s growth story.

If there was a perfect opportunity for investors to put in money in India’s commercial real estate and exit after a good return, nothing could be more perfect than REITs.

Issues related to Development in Real Estate...

At different places, I often hear people talking about how real estate companies are awash with funds. Some talk, in hushed tones, about the cash economy and others believe, and perpetuate the belief, that funds are lining up before realty companies to invest in them.

As much as realty companies would love to be in that situation, it is far from the truth. 

Realty companies face just about as much challenge raising capital as others. Some would argue that it is even more difficult to raise institutional capital because the sector has not been given industry status.

Despite the challenges faced by the developers in securing funding, nearly 35 per cent of it is added to the cost of a house by way of taxes and levies by the government. Urban land bodies and state governments together levy a variety of taxes in the form of registration, value added tax, service tax, developer agreement stamp duty and others.

There is constant pressure on cost because of the rising cost of input and cement prices in particular have been a worry for all construction companies. Getting working capital funding from banks is easier said than done.

With affordable housing projects being such a challenge to execute within the stipulated time and budget, it is a critical need of the hour that state governments take a fresh look at their priorities to rationalise the taxes on the real estate sector.

The demand to the government is not without precedent. During the 1990s, it took nearly five years for the mobile phone industry to get a million subscribers because the government levied a fixed licence fee from the telecom operators. When it changed to a revenue sharing formula after the New Telecom Policy in August 1999, the industry changed the face of India’s telecommunications industry. With a billion subscribers and over 400 million mobile internet users, India was adding 18 million subscribers at its peak every month! With a smart positive move in the 1990s, India is now ready to take its leap into the mobile digital dream.

The government’s policy of ‘Housing for All by 2022’ could follow that model too. The government needs to appreciate that the industry would want to make sure that its policy can be achieved and if both can join hands it can be a win-win situation for the people too.

Early signs of a seismic shift in banking are already being witnessed after the issue of new banking licences, payment bank licences and quicker integration of technology with banking. Many argue that the process is already underway and telecom and banking grip each others’ hands firmly and the pace of change could accelerate in the days ahead.

For the realty industry, several related developments may also be worth making a note of. All of this could help change the housing scenario in the country like never before. Better practices that enhance quality of construction and help turnaround projects faster are already available in India. Recent news reports suggest several realtors from Madhya Pradesh recently visited Delhi to take a firsthand look at the facilities of a company in Delhi. As companies face a shortage of quality construction workers, pressure of deadlines for delivering a project and seasonality worries, technology could come to their rescue.

Wider adoption of precast technology for realty projects will help in easing some of the pressures on realty companies. The pace at which precast technology helps cut down execution time is a great boon for companies and helps cut down on their operating capital cost. As the technology is adopted by companies outside the big cities, it will cut down the project time considerably.

Very soon, a regulator will be in place in every state to protect the consumers’ interest. Some states have started making the announcements and the tempo is expected to pick up.

It is now that the government needs to give a push to rationalising duties and taxes so that the policy dream can be achieved. Meeting a goal like that of providing housing for all is best done with the industry walking hand in hand with the government.